Understanding the pros and cons of rent-to-own homes

How does rent-to-own work?

When you and a homeowner work out a rent-to-own agreement — also known as a lease option, or lease-to-own — you make your monthly rent payments, plus you kick in extra money each month to be put toward buying the home.

Those additional funds might eventually be used to make a down payment on the home, or to pay closing costs.

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Rent-to-own: pros and cons

What are the advantages of rent-to-own?

Breathing room: In general, you'll need a very good credit history to qualify for a mortgage loan. If you have a lackluster credit score or a very thin credit record, renting to own can buy you time to straighten out your finances.

Trial run: You get to live in the home before committing to purchase it. Which means if you change your mind when the rental term is up, you can walk away. You're not tied down by a mortgage!

Locked-in price: A rent-to-own contract includes an agreed-upon purchase price for the home. The owner cannot raise the price in the future, so you don't have to worry about ever facing a higher price — even if the market improves.

What are the disadvantages?

Nonrefundable: If you decide you no longer wish to purchase the house, you have the right to void the contract. However, any money already paid toward the purchase of the house is lost.

Poorly regulated: Because rent-to-own contracts are less common than leases or purchase contracts, government rules often don't apply. You may find you have fewer protections in a dispute with a lender-homeowner.

Predatory owners: In some cases, the owner never intend on selling the property, and simply pocket money from the renter-buyer. The contracts may even include clauses allowing a short-notice eviction if a buyer misses a payment.