For those who can't qualify for a mortgage, there is another option for achieving the dream of becoming a homeowner. 
Renting to buy is an option that isn't common but is obtainable with the proper research and invested time. Renting to own is similar to signing a lease.
However, there is a clause in the contract that gives the buyer the opportunity to purchase the home later. If the renter pays on time and works to improve a derogatory credit history report, the option to buy is feasible. Some renters can also build option credits toward their future home purchase.
Understanding the Lease Option
The lease option allows a renter to build equity in the home before buying it. For example, if monthly rent payments are $500 and the home's sale value is $75,000, the renter would build around $5,000 in equity during the first year of renting with an option to buy. Usually a portion of the rent goes toward paying for the home, although not every penny may be applied.
There are several different ways to set up a lease with an option to buy. The amount of rent applied toward the purchase price will vary based on an individual contract. Some sellers may also require an option fee, which is paid up front in a lump sum; it's best to avoid paying an option fee that is 1% or less of the purchase price. The funds should be held in escrow. If the seller backs out, the fees should be refundable, though they might not be refundable if the renter backs out of the deal. Although the option period doesn't usually exceed three years, some sellers might grant a longer period. For payment planning and escrow details, see Payment and Funding Options.
Know the Seller
One of the riskiest parts of the rent-to-own option is that the seller might have financial difficulties in the future, which could make the lease option worthless. For example, if the seller is still paying a mortgage on the house and experiences financial difficulty, rent checks intended for an equity payment might be held and not applied toward the balance. If the lender goes through foreclosure, the buying option is lost together with the residence itself, which the bank may demand be vacated by the occupants.
If there is a mortgage on the home, it's best to ask the seller to sign a mortgage authorization form that allows the buyer to contact the lender to obtain current information about the loan. You may also want to review specialized insurance or captive arrangements that could affect ownership risks; see Rent-a-Captive (rented captive insurance) for more information.
Valuable Tips to Consider
Always ask the seller why they are selling the home and be wary of sellers who express difficulties in paying the mortgage. It's important to know what types of disclosures sellers are required to provide in your state; individual regulations vary, so contact a real estate agent or attorney if you need guidance.
It might also be necessary to have the home inspected. If repairs are necessary, negotiate them with the seller during the rental period. Although it might not be possible to arrive at a specific purchase price for the future, avoid vague wording such as "market value" in the contract; it's best to have a ballpark figure or a range of specific figures.
To learn more about setting up one of these contracts and purchasing proper insurance for the dwelling, talk to an agent.
Frequently Asked Questions
What is a rent-to-own or lease-option agreement?
A rent-to-own agreement lets a renter lease a home with an option to purchase it later, often with part of the rent credited toward the purchase price.
What is an option fee and is it refundable?
An option fee is an upfront payment that secures the buyer's right to purchase later; whether it is refundable depends on the contract terms and who cancels the deal.
Can the seller's mortgage or foreclosure affect my option to buy?
Yes — if the seller defaults on their mortgage and the lender forecloses, the buyer's option can be lost and occupants may be required to vacate the property.
Should I have the home inspected during the rental period?
Yes — a professional inspection can identify necessary repairs, which you should negotiate with the seller before completing a purchase.
Do I need an attorney to review a lease-option contract?
It is advisable to have a real estate attorney review the contract to ensure terms like option credits, escrow, and purchase price language are clear and enforceable.