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Home Buying

Rent-to-Own Homes: How Do They Work and Are They a Good Idea?

You have your eyes set on homeownership. But houses these days are crazy expensive—so much that maybe trying to save for a down payment or apply for a mortgage has been a challenge.

At this point, choosing a rent-to-own home might sound like a good alternative. But rent-to-own programs are really risky. (Spoiler alert: That’s why we don’t recommend them.)

To help you make a smart decision on your homeownership journey, we’ll explain exactly how rent-to-own homes work and help you weigh the pros and cons. Plus, we’ll look into other ways to buy a home.

What Are Rent-to-Own Homes?

A rent-to-own home—also called a lease-to-own home—is a house you lease for a specific time period, then buy when your lease ends.

You’ll have to sign a contract agreeing to the length of the lease, home price and other factors. (We’ll get to all that in a bit.) The contract will also say whether the seller has to put a designated amount of your rent money toward your equity—the portion of the home you’ll own, as opposed to what you’ll owe.

How Does Rent-to-Own Work?

Lease-to-own programs are different than the typical home-buying process because they delay homeownership for those who aren’t ready to commit to a purchase—while allowing that prospective buyer to live in the house as a renter in the meantime.

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We’ll explain the basic steps of how to rent to own a house. But first, let’s be clear: We’re not recommending this. We just want you to know how it works so you can see how complicated these contracts can get—and why you should avoid them!

1. Negotiate a purchase price.

Many rent-to-own agreements specify the purchase price up front. The price could be based on the home’s current value—or a predicted one. So if the seller thinks the house will be worth another $20,000 in five years, they’ll lock in that price now . . . and you’ll have to pay it, even if the house doesn’t go up in value.

When the price is predetermined like that, it’s set in stone as soon as the buyer and seller sign the contract. But in other cases, the rent-to-own agreement says the buyer and seller can set the purchase price after the lease expires.

2. Determine if rent payments go toward the purchase.

One question people always ask about rent-to-own homes is, “Will my monthly payments be lower?” The answer is no!

Lease-to-own rent payments are typically higher than regular rent prices in the same area. That’s because most sellers set aside a percentage of your rent payment each month as a credit toward your future purchase. Since they have to save that money for you—instead of putting it into their own pockets—they raise the rent to make up the difference.

Even if your rent doesn’t go toward the purchase price, rent-to-own homes are still typically more expensive than renting a regular apartment because of the next step in the process.

3. Find out if you’re responsible for repairs and upkeep while renting.

In a rent-to-own agreement, the seller may ask you to cover costs such as repairs, maintenance, homeowners association (HOA) fees and property taxes while you’re renting. So you could find yourself on the hook for everything from landscaping to a broken air-conditioning unit.

That’s why it’s so important to walk through the contract with an attorney who can clearly explain what each party is responsible for.

4. Agree on the term and type of lease-to-own contract.

You and the seller will agree to a specific lease term in the contract. That’s how long you’ll rent the home before buying it—usually anywhere from 1–3 years. That said, the term could be shorter or longer depending on your situation.

You’ll also both need to agree to the type of rent-to-own contract you want—either a lease-option agreement or a lease-purchase agreement (more on those soon).

5. Pay a nonrefundable, up-front fee.

Okay, so you’ve agreed to a contract. Now, you’re required to pay the seller a onetime, nonrefundable fee—also known as the option money, option fee or option of consideration—to show the seller you’ve got skin in the game.

This seals your opportunity to buy the house, and in some cases, the seller will put this amount toward your home equity. You can expect to pay a percentage of the home’s purchase price—typically 5% or less—as your option fee.

6. Transition from renting to buying the home.

Unless you save up enough cash to buy the house outright when your lease ends, you’ll need to get a mortgage.

At that point, your mortgage lender will set a closing date when you’ll take ownership of the property. Depending on the terms of the rent-to-own agreement, the rent money set aside for your purchase (and possibly the option money) will be credited to you as part of your down payment.

On the other hand, if you can’t qualify for a mortgage, the option to purchase could expire.

Types of Lease-to-Own Programs

There are two main types of contracts when you’re getting a rent-to-own home. They both lay out the terms for renting the house during the leasing phase, but they’re different when it comes to the buying phase.

  • Lease-option agreements – These contracts give you the option to purchase the home after the agreed-upon leasing period . . . but you don’t have to buy it. So if you might want to buy the home—but you’re not sure yet—the lease-option contract gives you an out in case you change your mind.
  • Lease-purchase agreements – These contracts legally obligate you to buy the house after your lease ends. There’s no backing out and no changing your mind—at least not without paying a lawyer thousands of dollars to get you out of the deal.

Is Rent-to-Own a Good Idea?

Rent-to-own programs may sound like a good idea to buyers who can’t quite qualify for a mortgage yet but want to get their foot in the door—literally!

The downside is rent-to-own homes come with big risks to consider. So let’s dig into the pros and cons.


1. You can avoid buyer competition.

At the end of the lease term, you won’t have to compete against other buyers for the property if you have a rent-to-own agreement. And that’s a huge relief given how competitive the housing market has been the last couple years! 

2. Everything is negotiable.

Because the process of buying rent-to-own homes is less regulated than a typical buying or rental process, there’s no standard rent-to-own contract. The terms are completely negotiable.

If you’re entering into a rent-to-own program, you need to talk to a trusted real estate agent and an attorney on the front end to make sure you understand—and are okay with—the terms of your unique contract.

3. You build a down payment over time.

Instead of having to fork over a significant down payment when you move in, you build equity over time by paying higher rent. That said, this is only the beginning of a down payment. It probably won’t cover the full amount.

For example, imagine you pay $1,500 a month, and the landlord puts $300 of that rent money toward your home purchase for the next two years. That’s only $7,200. And with median home prices over $400,000 these days, that’s less than 2% down.1 Yikes! That’s not nearly enough of a down payment. You need at least 10–20% down, so you’d better have a plan to save for the rest!

4. You don’t have to qualify for a mortgage right away.

You may be drawn to a rent-to-own program because you can’t afford to buy a home yet. Maybe you’re still paying off debt or you don’t have a down payment saved. Those things can stop you from getting a mortgage. Moving into a house without qualifying for a mortgage first may seem like the answer.

But this “pro” is actually a pretty big con. Here’s the truth: Your rent-to-own agreement is way more likely to fall through if you’re already in a financial mess. If your situation doesn’t change drastically while you’re renting, you still won’t be able to get a mortgage when your lease ends—putting you right back at square one. 


1. Your rent will be more expensive.

When your contract is set up so that part of your rent goes toward home equity every month, your rent prices will be higher. So basically, you’re stuck in a forced savings plan where you feel pressured to buy a house at the end—ready or not.

Why not just rent a place for less money and set aside the money for a down payment in your own bank account instead of your landlord’s?

2. You’ll pay extra for fees and repairs.

Remember, you’ll have to pay that up-front fee (see number 5 above) in order to have the option to purchase the home down the road. You won’t get that back if the deal doesn’t work out.

And don’t forget—you may be responsible for all repairs and upkeep even while renting. Unexpected emergencies can put a serious hole in your pocket for a house that isn’t even yours yet!

3. You could pay more than the home is worth.

The purchase price you lock in at the start of the rent-to-own contract is usually inflated to account for rising home values. But if you lease for a couple years, you have no way of knowing what the real estate market or local economy could do during that time.

Sure, your home value could go up, but it could also drop. That means you could end up paying more than the property is actually worth!

4. You lose money if you decide not to purchase the house.

Let’s say you get a new job that requires you to relocate. Maybe you still can’t qualify for a mortgage at the end of the lease term. Or maybe you just decide this house isn’t for you.

If you’re in a lease-option agreement, you can walk away from the contract. But what happens to all of the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back. And if you’re in a lease-purchase agreement, you’re just plain ol’ stuck.

5. Rent-to-own contracts favor the seller—not you.

With rent-to-own homes, the seller has most of the power. They make money either way (renting out or selling the house), and they know most people who go for lease-to-own deals are in a tight spot financially. So they give themselves lots of ways out of the deal.

Something as small as a late rent check or not paying for a repair in a “timely manner” could release the landlord from any obligation to honor the contract. There won’t be a knight in shining armor headed your way to save the day—or your deal.

6. You could lose the equity you build.

If the landlord’s financial situation changes and the house goes into foreclosure, that house goes to the bank or mortgage lender—not to you.

Or if the seller just up and changes their mind, you’d have to take expensive legal action to enforce the contract. That’s a cost you may not be able (or willing) to pay.

Is Rent-to-Own Worth It?

When it comes to lease-to-own homes, the cons outweigh the pros. Rent-to-own agreements have way too many loopholes. They’re not a guarantee. Plus, you lose a ton of money if the deal goes sour.

So keep your money in your own bank account and steer clear of rent-to-own contracts—they’re not worth it!

Alternatives to the Rent-to-Own Process

Rent-to-own may sound good in the short term, but it’s a big pile of regret in the long run. Trust us—it’s worth it to buy a house the smart way, without a stupid rent-to-own agreement.

Here’s what to do:

  • Keep renting. There’s no shame in renting while you pay down debt and save an emergency fund. In fact, that’s the best thing you can do!
  • Keep saving. After your finances are in order, start saving for a big down payment. Don’t buy a house—or sign an agreement to buy a house—when you’re broke!

We know cleaning up your financial mess and saving a down payment isn’t easy. It takes hard work and sacrifice. But it’s worth it!

You’ll set yourself up to pay off your house as fast as possible. And when you move into your new place, you’ll have peace of mind knowing you made a choice that will bless your family for years to come.

Find a Real Estate Expert

Buying a house the traditional way may take more time, but you’ll be glad you did. When you’re ready to buy, a good real estate agent can help you find a house you love that’s also in your budget.

We recommend working with a RamseyTrusted real estate agent. They’re top-performing agents who’ve made the cut and become part of our Endorsed Local Providers (ELP) program—the fast, easy way to find an agent you can count on.

Find a RamseyTrusted ELP near you!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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