What is Rent-to-Own?

Rent-to-Own: Explained in Plain English

Rent-to-own is a contractual agreement between a renter and a landlord where a renter pays rent monthly while the lease is in effect and has an option or obligation to buy the home when the rental period concludes.

Rent-to-own agreements typically consist of two parts: a standard lease agreement and an option to purchase. The terms of the agreement, including rent amount, length of the rental period, and purchase price, are agreed upon at the outset. The renter and owner may also agree for a portion of the renter's monthly payment to be applied toward a down payment for the eventual purchase of the home.

Rent-to-own may appeal to first-time home buyers because it allows them to "test" a home before committing to buy it, while also allowing time to build credit, save for a down payment, and improve their financial situation. However, rent-to-own contracts often favor the landlord, which can create risks for the renter.

Before entering a rent-to-own contract, home buyers should review the agreement with a real estate attorney. It is important to know that payments or rent credits toward the home's purchase price may be forfeited after a single late payment or for other breaches of the contract.

Rent-to-Own: A Real World Example

Imagine a first-time home buyer interested in a home but unable to get pre-approved for a low-down payment mortgage because of a recent bankruptcy.

Instead of buying a home outright, the buyer enters a rent-to-own agreement with a willing home seller, setting a future purchase price and agreeing to rent the home for two years, with a portion of the rent payments applied toward the purchase price.

After 24 months, the home buyer re-applies for a mortgage, gets approved, and the rent credits are deducted from the agreed-upon price as part of a successful purchase.