What Is a Rent-to-Own Home? A rent-to-own home—also known as a lease-option or lease-to-own agreement—is a housing arrangement where you rent a property with the possibility of purchasing it later. Typically, a portion of your monthly payment is allocated toward a future down payment, while the rest covers rent.

In the U.S., several companies operate in this space, including Divvy, ZeroDown, Landis Technologies, Home Partners of America, and Verbhouse.

How Does Rent-to-Own Work? The process generally follows these steps:

1. You sign a contract with the property owner or company, often paying an upfront fee or deposit.

2. You rent the home for a fixed period, usually between one and five years.

3. A portion of your rent is credited toward a future purchase.

4. At the end of the lease, you may have the option—or obligation—to buy the home.

An important detail: you do not own the property during the rental period. Ownership (title and deed) transfers only after you complete the purchase.

You’ll also pay a nonrefundable option fee (typically 1%–5% of the home price), which may count toward your down payment if you proceed with the purchase.

Types of Rent-to-Own Agreements

• Lease-Option Agreement: You have the right—but not the obligation—to buy the home at the end of the lease. You can walk away, though you’ll likely lose any fees and credits accumulated.

• Lease-Purchase Agreement: You are contractually required to buy the property when the lease ends. Failing to do so could result in penalties or legal consequences.

Understanding which type you’re entering is critical, as the financial and legal risks differ significantly.

Who Is It For? Rent-to-own arrangements are typically aimed at buyers who may not currently qualify for a mortgage, such as those:

• Without sufficient savings for a down payment

• With lower credit scores

• Carrying high debt-to-income ratios

• Earning inconsistent income (e.g., freelancers or gig workers)

This model provides time to improve financial standing while securing a potential future purchase.

Key Downsides to Consider

1. You Don’t Own the Property Yet Even though part of your payment may go toward a future purchase, a significant portion is still rent. This often makes rent-to-own more expensive than standard renting in the same area.

2. Additional Costs Unlike traditional rentals, you may be responsible for maintenance, repairs, property taxes, or HOA fees. These extra expenses can make it harder to save for a mortgage.

3. Risk of Losing Money If you choose not to buy—or cannot qualify for a mortgage—you may lose:

• Your option fee

• Any rent credits

• Money spent on repairs

4. Contract Complexity and Hidden Terms These agreements often favor the property owner. For example:

• Missing a payment could void the agreement

• Fees may apply to reinstate the contract

• Terms may significantly increase your total cost

What Happens If You Walk Away

Another downside? You’ll lose your initial deposit or option fee if you decide not to buy the house, which can total several thousand dollars. The company could even keep the portion of your monthly payments intended for a future down payment. Plus, you won’t get the extra money you put into home repairs or improvements if you decide to walk away.

If you entered into a lease-purchase agreement things can get really messy. Since you’re obligated under contract to purchase the home at a specific time, the owner can sue you if you’re unable to buy the property.

On the fence about buying a home? Here’s how to decide if it’s better to rent or buy.

6 Steps to Taking Before Buying a Rent-to-Own Home

Rent-to-own homes promote themselves as an affordable avenue to homeownership.

But the truth is, there’s a lot of expenses, and few rent-to-own agreements end in homeownership.

Divvy, a growing rent-to-own corporation, says about 40% of its renters have exercised their option to buy. Home Partners of America claims a 45% renter-to-homeowner conversion rate, according to a July 2022 report from Moody Analytics.

In short, less than half of people who enter these agreements end up buying a home. Those aren’t great odds.

Here’s what to watch out for when considering a rent-to-own home.

1. Understand the Rent-to-Own Agreement

Rent-to-own contracts include two distinct parts:

• The rental agreement, which outlines the terms you need to follow as a renter, just like any other lease.

• The purchase agreement, which outlines the terms under which you agree to eventually buy the home.

Make sure you’re clear on both the rental and purchase agreement terms. Ask the owner these questions if they’re not clearly stated in the contracts:

• Who will handle maintenance, repairs and improvements to the property?

• What happens if you miss a payment?

• How is the purchase price of the home calculated?

2. Understand the Home’s Purchase Price

Many rent-to-own agreements state the home purchase price up front.

The price could be based on the home’s current value or what the property might be worth in the future. For example, the seller could write the contract so the purchase price in five years is $30,000 more than it is today.

On the other hand, a rent-to-own agreement can let the buyer and seller set the purchase price after the agreement is signed but before the lease expires.

3. Make Sure You’re Ready for a Mortgage

Unless you can save up enough money during your lease to buy the home outright, you’ll need to qualify for a mortgage.

After all, the money you paid as a renter will likely only cover part of a down payment.

Here’s an example.

• You enter a rent-to-own agreement on a house valued at $275,000. Your lease agreement is for two years.

• Your monthly rent payment is $2,000.

• 20% of that payment ($400) goes toward saving for a down payment each month (also called a rent credit).

• At the end of your two-year lease, you’ll have a $9,600 rent credit saved.

To qualify for a 10% mortgage down payment, you’ll need $27,500. If you’re a first-time homebuyer, you could qualify for a 5% down payment, but you’d still need $13,750 — $4,150 more than you’ve saved in rent credits.

Your initial deposit or option fee might get credited to your down payment, which can help. But again, this all depends on the details of your specific rent-to-own agreement.

Before you sign, be realistic about how large of a monthly payment you can afford. And make sure you understand how large the down payment will be when it comes time to purchase the property.

How much house can you afford? Here’s how to do the math.

4. Talk to a Real Estate Agent or Attorney

Rent-to-own agreements are dense and complicated. You’ll need help from an independent real estate agent or an attorney to understand your rights and responsibilities.

A legal expert can identify clauses in a rent-to-own agreement that could prevent you from easily purchasing the home down the road.

For example, something as minor as a late rent check or not paying for a repair in a “timely manner” could mean the deal is off, and the landlord is no longer obligated to honor the agreement.

An attorney can help you identify these loopholes so you can hopefully negotiate more favorable terms with the owner before you sign.

5. Research the Property and the Seller

Rent-to-own homes are often marketed as “fixer-uppers.” Even if the house seems in good shape, do your due diligence.

It’s wise to order an independent appraisal, obtain a property inspection, ensure there’s no liens on the house and property taxes are up to date.

Look into the company that owns the home, too. Does it have a good track record of converting renters to owners? Or is it nearly impossible to find information about the owner? If it’s the latter, that’s a huge red flag.

You can look up property records on your county’s clerk of courts or appraiser’s website. Make sure the current owner is the person or company you’re signing a contract with.

6. Get Your Finances in Order

If poor credit is holding you back from purchasing a home the traditional way, meet with a couple mortgage lenders during your lease to learn what steps you need to take to qualify.

If you can’t qualify for a mortgage today due to poor credit or a high debt-to-income ratio, those same barriers will prevent you from doing so in the future —- unless you take action.

Meeting with a credit counselor or financial advisor before your lease expires is a good way to create a budget and improve your credit score.

Take steps today to build a good credit score. Here are 10 ways to make your credit score soar this year.

Alternatives to Rent-to-Own

Rent-to-own programs are tempting if you want to own a home but aren’t able to do so due to your current financial situation.

But it’s not your only option. Here are some alternatives to rent-to-own homes:

• Explore first-time homebuyer programs in your state that can help with a down payment and closing costs. These government programs can also help you lock in more competitive mortgage rates.

• Several big banks, including Chase and Bank of America, are offering zero-down mortgage programs in minority communities. You might qualify for one of those.

• Consider getting someone, like a parent, to co-sign the mortgage with you.

• Work with a credit counselor or financial advisor to create a roadmap of what it will take to get a traditional mortgage.

Buying a home is a great way to build wealth. But entering a rent-to-own agreement can turn your homeownership dreams into a nightmare. You’re likely better off saving money for a down payment on your own — not forking extra money over to a landlord.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. She focuses on retirement, credit scores, investing and life insurance.