Rent-to-own is a housing arrangement where you rent a home for a set period with the option to buy it later. Here's how it works:
- You sign a lease agreement that typically lasts 1 to 3 years, during which you live in the home as a renter but have the option (or sometimes obligation) to purchase the property at the end of the lease
- At the start, you usually pay an upfront, non-refundable option fee (often 1% to 7% of the home's purchase price) that secures your right to buy the home later. This fee may be applied toward the purchase price if you decide to buy
- Your monthly rent is often higher than market rent because a portion of it—called rent credits or rent premiums—is set aside to go toward your future down payment or purchase price
- The purchase price is generally agreed upon upfront, sometimes set slightly above current market value to account for expected appreciation during the lease period
- When the lease ends, you can choose to buy the home by securing a mortgage and applying your accumulated option fee and rent credits toward the down payment. If you decide not to buy or cannot qualify for a mortgage, you may lose the option fee and rent credits, depending on the contract terms
- Rent-to-own contracts come in two main types: lease-option (you have the option but not the obligation to buy) and lease-purchase (you are obligated to buy at lease end)
This arrangement helps renters who need time to save for a down payment or improve their credit to eventually purchase a home, while sellers earn rental income and potentially secure a future sale
. In summary, rent-to-own works by combining a rental lease with a future purchase option, where part of your rent and an upfront fee contribute toward buying the home later under agreed terms.
