How does rent-to-own work?

You rent a home and pay an option fee for the right to buy it at a set price by a deadline, often 1 to 3 years. Part of each month's rent may count toward the price. At the end you get a mortgage and buy, or walk away.

Do I get my option fee back if I don't buy?

Usually not. The option fee pays for the right to buy, so it's kept by the owner if you don't. The same goes for rent credits.

Do rent credits count toward a down payment?

Often, but it's up to the lender. Many lenders count only the part of the rent above market rent, and want proof of every payment. Ask a lender before you sign.

Is rent-to-own a good idea?

It can help a buyer who needs time to fix credit or save, and wants to lock in a home and price. It costs more than renting, and you lose the fee and credits if you can't buy, so go in with a plan to qualify.

What's the difference between a lease-option and a lease-purchase?

With a lease-option you may buy. With a lease-purchase you've agreed to buy, and walking away can mean a lawsuit. Make sure you know which one you're signing.

Why would an owner offer rent-to-own?

To earn more than regular rent, collect an option fee, sell at a set price, and have a tenant who cares for the home like an owner. If the renter walks away, the owner keeps the fee and the home.

Rent-to-own calculator

Rent a home now with the option to buy it later: see how much counts toward the price, the cash still needed, and what's lost if you don't buy.

What this answers: If you rent a home with the option to buy it later, how much will count toward buying, and what happens if you don't?

How this deal works: The renter pays an option fee (money up front for the right to buy) and rent, and part of each month's rent can count toward the price. At the end of the lease, they buy at the agreed price or walk away.

Start from an example, then change any number:

Toward buying

$14,700

You'd have $14,700 toward buying after 3 years. That covers the $14,000 down payment the lender wants; you'd still need about $8,400 for closing costs. If prices move as you expect, you'd own $29,736 of equity the day you buy. If you walk away, you lose $14,700.

Paid during the lease

$75,900

Extra over market rent

$5,400

Home value at the end

$295,036

Equity on day one

$29,736

Cash still needed

$8,400

Lost if you walk away

$14,700

Mortgage payment after buying

$1,721

Credits toward buying

The option fee plus rent credits, by year. The line marks the $14,000 down payment the lender wants; bars turn green once they reach it.

Start$7,500
Year 1$9,900
Year 2$12,300
Year 3$14,700

What could go wrong

The renter can't get a mortgage in time. If they can't qualify by the end of the lease, they lose the $14,700 of fees and credits. Talk to a lender at the start about what to fix (credit, debt, savings), not at the end.
The owner's problems become the renter's. If the owner stops paying their mortgage or taxes, or has liens on the home, the renter could lose it, and the fees and credits with it. A title search before signing shows what's owed.
Repairs and the condition of the home. Many agreements make the renter pay for repairs, like an owner would. Get an inspection first, and agree in writing who fixes what.
For the owner: the renter walks away. You keep the fee and the rent, but you're a landlord again and may need to find a new tenant or buyer. A renter-buyer usually takes better care of the home, which helps.

Before you sign

Write the lease and the option to buy into a signed agreement: the price, the fee, the credits, the deadline, and who pays for repairs.
Get a title search and record a memorandum of the option with the county, so a sale or lien can't skip over the renter.
Renter: get an inspection and an appraisal, and talk to a lender now about what you'll need to qualify.
Agree how rent credits are tracked, and keep proof of every payment. Lenders may ask for it.
Owner: check the renter's credit, income and references, like any tenant.

This is not legal or tax advice. The rules for these deals vary by state. Have a real estate attorney review the contract before you sign.

Toward buying$14,700

How this is calculated

1Months = lease length in years × 12. Rent paid = monthly rent × months.
2Toward buying = option fee + rent credit × months (never more than the price). The option fee is assumed to count toward the price, as it usually does.
3Extra over market rent = (rent − market rent) × months.
4Home value at the end = value today × (1 + yearly change)^years.
5Down payment needed = price × the lender's down payment %. Cash still needed = any part the credits don't cover + closing costs.
6Mortgage = price − credits − any extra cash for the down payment, paid over 30 years at the mortgage rate.
7Equity on day one = home value at the end − price + credits.
8Lost if you walk away = option fee + rent credits. Compared with renting elsewhere, the cost is the option fee + the extra rent paid.
9Owner: collects the fee + rent; cash flow = rent − their mortgage payment; receives price − credits if the renter buys.

Assumes the rent and credits stay the same for the whole lease, the option fee counts toward the price, and home values change at a steady rate. Taxes, insurance, repairs and fees aren't included. Lenders decide whether credits count toward a down payment, often only the part of the rent above market rent. This is not legal or tax advice: lease-option rules vary by state, so have a real estate attorney review the agreement.

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Words to know

Rent-to-own: A lease with an option to buy (a lease-option). The renter can buy the home at an agreed price by a deadline, but doesn't have to.
Option fee: Money the renter pays up front for the right to buy. It usually counts toward the price and isn't refunded if they don't buy.
Rent credit: The part of each month's rent that counts toward the price.
Lease-purchase: A stricter version where the renter agrees to buy, not just has the option. Walking away can mean being sued for breaking the contract.
Market rent: What a similar home rents for without an option to buy.
Equity: What the home is worth minus what's owed on it.
Appraisal: A lender's estimate of the home's value. A lender won't usually lend more than it.
Memorandum of option: A short document recorded with the county that shows the renter has an option on the home.

Frequently asked questions

How does rent-to-own work?: You rent a home and pay an option fee for the right to buy it at a set price by a deadline, often 1 to 3 years. Part of each month's rent may count toward the price. At the end you get a mortgage and buy, or walk away.
Do I get my option fee back if I don't buy?: Usually not. The option fee pays for the right to buy, so it's kept by the owner if you don't. The same goes for rent credits.
Do rent credits count toward a down payment?: Often, but it's up to the lender. Many lenders count only the part of the rent above market rent, and want proof of every payment. Ask a lender before you sign.
Is rent-to-own a good idea?: It can help a buyer who needs time to fix credit or save, and wants to lock in a home and price. It costs more than renting, and you lose the fee and credits if you can't buy, so go in with a plan to qualify.
What's the difference between a lease-option and a lease-purchase?: With a lease-option you may buy. With a lease-purchase you've agreed to buy, and walking away can mean a lawsuit. Make sure you know which one you're signing.
Why would an owner offer rent-to-own?: To earn more than regular rent, collect an option fee, sell at a set price, and have a tenant who cares for the home like an owner. If the renter walks away, the owner keeps the fee and the home.