How Do Lease-to-Own Home Purchases Work?

When renters enter a lease-to-own contract with a homeowner, they usually pay a rent that is higher than the current market rate, and the homeowner applies the excess rent to a future potential purchase. Such contracts give renters the option to purchase the home within the next few years, although the contracts generally don’t require renters to complete the purchase, according to Bankrate. Lease-to-own contracts usually last two to five years.

A lease-to-own option gives renters several benefits. Renters who don’t have enough money for a down payment have extra time to save for an eventual purchase. While they are saving, the renters are living in a home they might not be able to afford otherwise. The lease-to-own option also gives renters with damaged credit time to rehabilitate their ratings so they can qualify for a traditional mortgage when the lease contract expires, Bankrate notes.

Lease-to-own options also have some potential disadvantages. The renters and the homeowner must agree on a future price at the outset of the contract, but if the home’s value decreases, the landlord doesn’t have to lower the agreed-upon price. The renters don’t have to purchase the home at that point, but they lose their extra rent money if they walk away from the deal, Bankrate cautions.