real estate

4 questions to ask about a lease-to-buy option for a home

Couple moving into their new home | Hero Images/Getty Images

If you lack a down payment or your credit is subpar, it can be frustrating when you find the home you want. A lease-option -- a contract that allows you to buy a home after your lease term ends -- can be a solution to the problem.

What is a lease-option?

A contract in which a landlord and tenant agree that, at the end of a specified period, the renter may buy the property. The tenant pays rent plus an additional amount each month. At the end of the lease, the renter may use the cumulative extra payments as a down payment.

Also called:

  • Rent-option
  • Lease-to-buy option
  • Rent-to-buy option
  • Lease-with-option-to-buy
  • Lease with option to purchase
  • Rent-to-own

Before you sign, have a lawyer review the contract. And ask the following 4 questions.

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How is the deal structured?

Usually, part of your rent is credited toward your future purchase.

"A rent-to-own contract needs to be devised so that the full rental amount is more than market rate for that size, style and age of home in that specific neighborhood," says Marcy Imperi, a Realtor with Century 21 HomeStar in Highland Heights, Ohio.

Imperi says that if you're paying market-rate rent, a lender may not credit any of the funds you paid to your landlord toward the purchase. Talk to a lender so you understand how you can qualify for a loan in the future.

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Who's responsible for what?

A good lease-option agreement will put in writing who is responsible for maintenance, repairs and upkeep, Imperi says.

Renters need renter's insurance and owners need landlord's insurance. Both renters and owners should keep good records of payments for the lender when you apply for a loan.

The agreement should spell out who is paying for any association fees and utilities, too.

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How will the deed be transferred to the buyer?

Buyers should know ahead of time the deposit needed to complete the purchase, says Jeff Lesley, a broker and Realtor with Century 21 Sweyer & Associates in Wilmington, North Carolina.

"If the sellers are taking the risk of removing their home from the market for a deferred lump sum of cash flow, then what nonrefundable commitment do they have from you?" asks Lesley.

Imperi says buyers and sellers who agree on a purchase price in advance should include a clause in the purchase agreement that the sale is contingent on an appraisal. Home values can fluctuate during your lease period, so it's important to know if the price can be adjusted before you buy.

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What happens if you're not ready to buy when the contract ends?

Lesley says there should be a clause in the contract about your options, particularly if your credit still isn't up to par.

"Unless you're working on credit repair and have a solid plan to be eligible for a loan within 2 years or less, this is just a rental, not a rent-to-own," Imperi says. "If you're enrolled in a credit repair program, you should be sharing progress updates with your landlord."

Understanding your rights and responsibilities in a rent-to-own agreement is essential. If you don't, you could end up in a rent-to-rent situation without making any progress toward homeownership.

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