Rent-to-Own (Lease-Purchase)

What Is Rent-to-Own?

Rent-to-own is a path to homeownership that starts as a rental. The tenant signs a lease plus an agreement to buy the home later, usually at a price fixed at the start. Part of each rent payment may be set aside as a rent credit toward the down payment.

There are two main forms:

• Lease-option. The tenant has the right, but not the obligation, to buy.
• Lease-purchase. The tenant commits to buy, typically by a deadline.

The labels are not used consistently. Some sources, including the National Consumer Law Center (NCLC), treat “lease-purchase” as another name for a lease with an option to buy, so the contract itself matters more than what it is called.

How It Works

A lease with an option to buy is really two contracts: a lease, which carries the usual landlord-tenant protections, and an option that gives the tenant the right to buy at a set price within a fixed time. NCLC describes a typical option period as six months to two years. The seller may charge an upfront payment for the option. During the lease, the tenant tries to save, repair credit and qualify for a mortgage. At the end, the tenant buys the home with a mortgage, and any accumulated credits reduce the cash needed.

Lenders limit how much of those credits they will recognize. Under Fannie Mae’s Selling Guide, the rent credit can be no more than the difference between the appraiser’s market rent and the rent actually paid. The agreement must have an original term of at least 12 months, and the borrower must document the payments.

Public programs use lease-purchase too. Under HUD’s HOME Investment Partnerships rules, the buyer must qualify as low-income when signing, and the agreement must require purchase within 36 months. If that buyer does not buy, the owner must sell to another eligible low-income buyer within 48 months of the original agreement. If that fails too, the home becomes HOME rental housing.

Example

Suppose a household signs a three-year agreement at $1,600 a month on a home the appraiser says would rent for $1,450. The extra $150 a month adds up to $5,400 over 36 months. Under Fannie Mae’s rule, that is the most that could count toward the down payment.

Rent-to-Own vs. Contract for Deed

A contract for deed, also called a land installment contract, is seller financing. The buyer pays the seller over time, sometimes for decades, and gets the deed only after the last payment. NCLC and the Consumer Financial Protection Bureau have documented the risks. Buyers typically take on repairs and property taxes, homes are often in poor condition or overpriced, and a buyer who defaults can lose the home along with everything paid and invested in it.

Criticisms and Limitations

• The line can blur. NCLC reports that some agreements labeled as leases with an option to buy run for very long terms and require nothing but the payments to transfer ownership. NCLC calls such an agreement indistinguishable from a contract for deed. Some states regulate the two the same way.
• Buying is not guaranteed. A tenant who cannot qualify for a mortgage before the option expires does not get the home. What happens to any option payment or rent credit depends on the contract, so the terms are worth reading closely before signing.
• Lenders discount rent credits. As the Fannie Mae rule shows, a credit written into the agreement may not fully count toward a down payment.

Program-run lease-purchase adds income rules and fixed timelines. For other routes into ownership, see Pathways from Renting to Owning.