How Do Rent-to-Own Agreements Work?

In rent-to-own agreements, home owners lease homes to renters with options to eventually buy the home. Renters typically pay an up-front fee, which is a percentage of the value of the home, and a rent premium on top of the usual rent. If the renter decides to buy the home at the end of the option period, both the fee and the premium become part of the down payment.

Rent-to-own agreements are often used by homeowners who have moved to a new home but are having difficulty selling their previous home. These agreements allow them to use the rent to make the mortgage payments on their old homes while they find a buyer. In rent-to-own agreements, renters are usually accountable for the maintenance of the home. A renter who decides not to buy the home at the end of the lease agreement forfeits the up-front payment and rent premiums. The price of the home is locked into the rent-to-own agreement and does not change regardless of the rise or fall of prices in the local housing market.

Rent-to-own agreements give renters with poor credit the possibility of buying a home. However, because mortgages attached to rent-to-own agreements often carry higher interest rates, the eventual cost of the home is typically higher than with a standard mortgage. Additionally, if the renter falls behind in payments, there is the possibility of eviction and loss of up-front payment and premiums.