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Rent-to-own programs (also called lease-to-own) let you pay rent to live in a home for a set period. You can buy the house from your landlord at the end of your lease period at an agreed-upon price.
If you're struggling with mortgage approval due to poor credit, low income, or lack of down payment funds, rent-to-own programs claim to put you on the path to homeownership before you're ready to commit.
Rent-to-own contracts can also have many nuances, so it's crucial to fully understand the terms and conditions before signing. We recommend seeking advice from a realtor, real estate attorney, or financial adviser.
💡 Key takeaway
Make sure rent-to-own is a risk worth taking
Rent-to-own homes can be a viable option for aspiring homeowners who have less-than-perfect credit (580 or lower) or need time to save up for a down payment.
But not all rent-to-own agreements are legitimate or affordable — in fact, experts warn that the success rate of rent-to-own programs is often below 50%.[1] If you can qualify for a mortgage now, need flexibility, or aren't sure if you want to live in the property long-term, these programs are probably not a good fit for you.
How does rent-to-own work?
You can come to a rent-to-own agreement with companies or individual landlords. The specific terms will vary by provider, but the process typically goes like this:
- Find the house.
- Sign the contract.
- Rent the home and start saving for the purchase.
- Buy the house or move out.
A realtor can help you evaluate your options and determine which one has the best terms for you. Clever can match you with an experienced local buyer's agent for assistance.
Choosing an eligible home
You can search for listings with the help of a local realtor or rent-to-own company, such as Divvy Homes. Consider whether you want to live in a specific house, neighborhood, or district. Rent-to-own companies typically only allow you to choose single-family homes and townhouses, and they may not allow condos, new construction, or homes in flood zones.[2]
Rent-to-own contracts
There are two types of rent-to-own contracts: lease option and lease–purchase. The contract outlines your "option fee" (buy-in price), monthly rent payments, and the home's future purchase price and down payment. You can work with your agent to negotiate these terms to your advantage.
| Lease option agreement | Lease–purchase agreement |
|---|---|
| Choice to buy the home at the end of the lease or move out | Legal obligation to buy the property at the end of the lease |
| Option fee is 1–5% of the purchase price | May require higher deposit and monthly rent |
| Good for test-driving a neighborhood | Good for committing to a property |
Before signing the contract, make sure you fully understand its terms and conditions, with the guidance of a real estate professional.
Who pays property taxes in rent-to-own agreements?
Whoever legally owns the property pays the taxes on it. The question is when the property ownership transfers to the tenant: after the lease period or at signing.
In typical rent-to-own agreements, the landlord or company covers the property taxes during the lease period, after which the renter can buy the home and take over ownership.
However, the IRS considers some rent-to-own agreements as "installment sales," so ownership transfers when the agreement is executed. In these cases, the renter is often considered the owner during the leasing period and is responsible for property taxes (and other potential expenses).[3]
📜 Lease terms to weigh
- The length of the rental period (usually between one and five years): a longer rental period will cost you more in rent, but also give you more time to save up for your down payment.
- The option fee, which can be a one-time payment or an annual cost that increases 3–5% per year.
- How the home's purchase price was determined — for example, a rent-to-own company's valuation based on fair market value may cost you more than if the valuation is based on an official appraisal.
- If rent increases each year (and by how much) impacts your ability to afford future rent payments and save up for your down payment.
- Who's responsible for repairs and maintenance affects your budget and the future condition of the home.
- If there's a termination fee for failing to buy the house at the end of your lease, and if so, what the fee amount is.
Move in and start saving
Generally, your monthly rent will be higher than a traditional rental because part of that payment (typically 10–25%) will go toward funding your future down payment. For example, a home with a monthly rent of $2,000 may cost you $2,200 to $2,500 to account for built-in savings.
During your rental period, you can take steps to build your credit score, improve your finances, and get a feel for the property you're in.
» SEE: How you can save for a down payment with a traditional rental
Exit the agreement: Buy the house or move out
If you decide to buy the house at the end of your lease, you must get mortgage preapproval and then complete the purchase with the help of your realtor or the rent-to-own company.
If you choose NOT to buy the home or still don't qualify for a mortgage, you'll have to move out. You may owe a termination fee (up to 3% of the house price) and lose some or all of your down payment savings.
Pro tip
Who do rent-to-own homes work best for?
"Rent-to-own can offer a powerful alternative for achieving some of the stability of homeownership before people are financially ready to buy, or know where they want to live," says Michelle Boyd, a housing policy expert and chief strategy officer at Terner Housing Innovation Labs.
👍 The ideal candidates for rent-to-own are people who…
- Have a plan to improve credit scores and finances — if your current credit score disqualifies you from getting a mortgage but you expect it to get better in the future.
- Need time to save up for a down payment — if you can afford monthly payments but don't have the required thousands of dollars in down payment funds.
- Want to live in a specific house, neighborhood, or city — for example, if you want to move into a certain school district sooner rather than later.
Who should avoid it
👎 You might want to avoid rent-to-own programs if you don't think you'll qualify for financing in the future or can qualify for a mortgage right now.
Most aspiring homeowners are better off continuing to rent or taking out a traditional mortgage. Because rent-to-own homes require a big commitment and aren't nearly as flexible as traditional rentals, they're not suitable for everyone.
» JUMP: Best rent-to-own alternatives
Since rent-to-own agreements often come with higher rent payments than traditional rentals. If you're not confident in your ability to qualify for a mortgage — maybe because of a low credit score or limited credit history — then you should avoid these programs. Boyd says, "It's best to explore other options such as saving for a down payment, improving your credit score, or looking into affordable housing programs."
Making the most of a rent-to-own home also means committing to a property, especially because some programs charge high termination fees if you don't buy the home. A job transfer, family illness, or other unpredictable circumstances can cause you to relocate.
"The actual success rate or conversion rate for some rent-to-own companies is quite low, often far below 50%," Boyd says. So, if you anticipate moving within a few years or are unprepared to forfeit all that money, sinking your funds into this kind of agreement isn't worth it.
Finally, if you already have the means to qualify for traditional financing (i.e., a mortgage), you can skip the "rent" and jump right into the "to own" part of your journey. It'll cost you much less in the long run.
Pro tip
When considering your mortgage eligibility, don't just rely on a conversation with a rent-to-own salesperson. Boyd recommends consulting with a qualified homeownership counseling agency or a lender. You can search for housing counselors at the Consumer Finance Protection Bureau.
Pros and cons of rent-to-own
Pros
- Get you into your desired home now
- Build up down payment savings
- Lock in your purchase price
- Potentially reduce moving costs
Cons
- Higher up-front costs
- Termination fees
- Extra maintenance costs
- Limited selection of homes
- Complicated contracts
Rent-to-own programs offer several advantages. They let you move into your desired home and lock in your preferred neighborhood, even if you don’t currently qualify for a mortgage. These programs help build up your down payment savings, as part of your rent goes toward it.
You also get extra time to improve your credit score, potentially qualifying for better mortgage terms. Additionally, rent-to-own agreements lock in the purchase price, which can be beneficial if housing prices rise, and they can save you moving costs by eliminating the need for another move once the rental period ends.
However, rent-to-own agreements have downsides. They often involve high upfront costs, including a nonrefundable option fee of 1–5% of the purchase price. You risk losing money if you can't buy the home due to unforeseen circumstances, leading to forfeiting your down payment savings and paying a termination fee.
You might also be responsible for maintenance costs during the rental period. The selection of rent-to-own homes is limited, and if prices drop, you could pay more than the home's market value. Additionally, these contracts can be legally complex, requiring careful review to understand all terms and responsibilities.
⚠️ Warning
Not all rent-to-own agreements are legitimate!
Rent-to-own programs aren't well regulated, so there's very little oversight when it comes to potentially predatory practices. As a result, there has been a significant rise in real estate and rental fraud: in 2021, 11,578 people fell victim to real estate or rental fraud (including rent-to-own scams), a 64% jump from the previous year.[4]
The Federal Trade Commission issued a consumer warning about rent-to-own scams.
Rent-to-own home alternatives
Rent-to-own programs aren't for everyone. Here are some other options to consider when looking for a home.
Traditional rentals plus savings
Renting could make more sense if you don't quite meet the credit requirements or have money saved for a conventional mortgage. Traditional rentals usually carry lower monthly payments than rent-to-own agreements, making them more cost-effective.
If you save your money in an account that earns interest — such as a high-yield savings account, money market account, or certificate of deposit — you can grow your home fund while you rent.
Government-backed loan programs
You can look into loan programs like those backed by the Federal Housing Administration, Department of Agriculture, or Department of Veterans Affairs. These provide low down payment financing options for borrowers with less–than–perfect credit and may provide more favorable loan terms and lower interest rates.
These loan programs also have income restrictions, credit score minimums, and other specific requirements such as being a first-time home buyer or having a military background. Review these qualifications carefully before proceeding with an application.
Government assistance programs
Various state and local government programs may provide financial assistance to low-income families looking to buy a home. These programs may include grants for down payments, low-interest home loans, assistance with closing costs, and educational resources for first-time home buyers.
You can find programs in your area by checking with:
- National Council of State Housing Agencies (NCSHA)
- Nonprofits like NeighborWorks America or the National Homebuyers Fund (NHF)
- A local HUD-approved housing counselor
- A local realtor
Seller financing
If you don't qualify for traditional financing, the seller could act as the lender and provide financing with more lenient requirements. This is also known as owner financing.
However, seller financing is often a complex, risky process. The loan terms may not be in your best interest, and there's no guarantee the seller will abide by your agreement. It's best to seek advice from a realtor or attorney before considering this option.
⚠️ Warning
A contract for deed is a fixed-term agreement where the buyer pays rent and is responsible for maintenance but does not have full ownership of the property. This type of agreement was more prevalent in the past, but it's still an issue to watch out for and shouldn't be confused with modern rent-to-own programs.
How do I find rent-to-own homes near me?
Hire a local realtor
A real estate agent can help you find and evaluate legitimate rent-to-own listings, negotiate the contract terms, and offer guidance throughout the process — including helping you avoid scams.
If you're ready to start your rent-to-own journey, Clever can connect you with a top-rated local buyer's agent to help you find the best listings. Don't miss out on this chance to secure your dream home. Contact us today to get started!
Work with a rent-to-own company
Several local and national real estate companies offer rent-to-own programs, which buy the house upfront and allow you to rent it from them for a set period.
However, not all rent-to-own companies are reputable or legitimate, and some programs are deceptively expensive. Here are a few well-known companies:
- Divvy Homes
- Trio
- Home Partners
- Landis Technologies
Search online
If you want to research before talking to a realtor, search real estate listing websites for rent-to-own properties. Websites like HomeFinder, Hidden Listings, and Rent to Own Labs often advertise rent-to-own home listings.
Bottom line
Rent-to-own agreements can offer a path to homeownership for those with limited financial options. They allow you to live in your desired home while working on improving your credit score and saving for a down payment. However, these agreements carry significant risks, including high upfront costs, potential investment loss if you can't buy the home, and complex legal terms.
Before entering a rent-to-own agreement, exploring other options like low-down payment mortgages and government assistance programs is crucial. Consulting with a local real estate agent, attorney, or financial adviser can provide valuable guidance and help you make an informed decision. This way, you can better evaluate whether rent-to-own is your best option.
FAQs
What is a rent-to-own home and how does it work?
In a rent-to-own arrangement, you can buy a home after renting it for a few years. The contract usually requires you to pay more in rent than the standard fair market value, with the additional money usually going toward the down payment or the final purchase price of the property.
What's the difference between a lease option and a lease-purchase agreement?
A lease option allows you to test out living in a home before committing to a purchase, while a lease purchase requires you to buy the property at the end of the lease period.
Do rent-to-own homes help build your credit?
A rent-to-own agreement can help build your credit if the landlord or company reports your timely rent payments to credit bureaus. Not all rent-to-own providers participate in credit reporting, though, so check before entering into an agreement.
Where can I find rent-to-own home options?
A few real estate sites list rent-to-own homes, but you may struggle to find listings in your area. A better option is to connect with a local real estate agent. Local realtors can connect you with sellers willing to rent-to-own their homes or help you compare rent-to-own companies.
Why trust us
Our team at Clever dedicated several weeks to learning the ins and outs of rent-to-own home programs to create this comprehensive guide. We studied contract agreements and sought the expertise of industry leaders, including the heads of rent-to-own companies.
Our experts
- Marjorie Scholtz, the CEO of Verbhouse, a rent-to-own company that aims to provide affordable home financing options for low and middle-income workers in high-cost housing markets. Marjorie is also a licensed real estate professional and previously worked as a co-founder and CEO of Stangl Advisors, helping people navigate loan modifications, short sales, and foreclosure alternatives.
- Michelle Boyd, a housing policy expert who works with Terner Center, a nonprofit organization dedicated to making housing more affordable and fair for consumers. Boyd also works with Terner Labs, a nonprofit affiliate that leverages technology to improve housing affordability and sustainability. She has supported 17 early-stage companies over the past four years, focusing on real estate development and making homeownership more accessible. Recently, Michelle worked with TechEquity to write "Rent-to-Own: The American Dream."
- Bruce Mohr, a senior investment adviser and credit consultant with FairCredit.com. Mohr has 15 years of experience in the investment advisory business and works with clients on achieving creditworthiness and financial stability.
About the authors
Steve Nicastro is a real estate professional and personal finance writer based in South Carolina. He has first-hand experience with rent-to-own homes, having helped potential home buyers evaluate rent-to-own listings and programs.
He believes working with a seasoned buyer's agent can greatly improve your search for a rent-to-own home. These agents will use their access to the multiple listing service (MLS), industry connections, and local knowledge of rent-to-own companies to help you find the best housing options in your area. They can also assist with understanding and negotiating rent-to-own agreements and ensure your interests are protected during the process.
Amy Beardsley is a content writer at Clever Real Estate. She specializes in writing about real estate, insurance, and technology and has worked with various reputable brands, including NerdWallet, Robinhood, LendingTree, Engel & Völkers, Opulence International Realty, Insurify, Legal & General, and NEXT Insurance. Her industry experience brings valuable insights to her writing and helps clients with content strategy.
