How to Buy a House Using a Lease Option

Co-authored by Ryan Baril

Last Updated: January 31, 2023 Approved

You might have found your dream home, but your credit isn't quite high enough to qualify for a loan or you have no savings for a down payment. Don’t worry—a lease with an option to buy might be perfect for you. With this arrangement, you pay rent and have the option to buy the property after a few years. Some of the rent you pay will go to your down payment, and as a bonus you’ll have time to clean up your credit before seeking a mortgage.

Part 1

Part 1 of 4:

Finding a Lease-to-Buy Home

Homeowners often advertise their houses as lease-to-own. Drive around and look at signs. Typically, the sign will state the purchase price and the monthly rent. Check all neighborhoods you’d like to live in.
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Ask a seller to consider a lease-to-own arrangement. Many sellers have never thought about leasing their home to a potential buyer. However, if the market is slow, they might consider it. If you find a home you love, then ask the seller if they’re open to a lease-to-own arrangement.^{[1]
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- Search websites to see if a home has been on the market for more than six months. If so, the owner might be looking to earn some money on it, so a lease-to-own arrangement might be perfect.
Agents usually know about lease-to-own listings.^{[2]
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Research source} They also might know of properties that have been sitting on the market for a long time. Find a real estate agent online or in your phone book and schedule a consultation.
Websites like IRentToOwn and HousingList contain lease-to-own listings. You’ll need to pay a subscription fee to use many of these websites. However, it’s a good option if you can’t find anything on your own and don’t want to hire an agent.^{[3]
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Part 2

Part 2 of 4:

Researching the Home and Owner

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Check why the owner is selling. Good reasons include the owner has bought a new house and needs to rent out the current property, or they are preparing to move for a job. When you look at the home, you can ask in an off-hand manner why they are selling.
- Listen for signs the owner is in financial trouble. For example, they might be vague, or they might insist they need to get someone in the house fast.
- If the owner goes bankrupt while you’re leasing, they’ll probably lose the house and you’ll also be evicted at the same time. For this reason, you’ll want a seller who is financially stable.^{[4]
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Run a credit check. Ask the owner’s permission. They might protest, but explain your concerns and refuse to go ahead until you run a check. You can contact Experian, Equifax, or TransUnion to run the check.^{[5]
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- Look for a large debt load, such as maxed-out credit cards or accounts in collections. These are signs of financial distress.
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Analyze tax records. You can get property tax records from the county tax assessor’s office. Make sure the person you’ve been working with is actually the owner. Sometimes, fraudsters will pretend to own a home they’ve never even lived in!
- You can also check whether any tax liens have been placed on the property.^{[6]
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  Research source} Tax liens are huge red flags, so if you find any then walk away.
- Look for other liens too, such as mechanic’s liens or liens placed on the property by someone who won a lawsuit against the owner.
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Pay attention to red flags. Many fraudsters are looking for a gullible buyer, so you need to protect yourself. Look out for the following signs that a lease-to-own arrangement is shady:^{[7]
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- The seller wants to charge below-market rent.
- The seller doesn’t want to check your credit history.
- You’re charged an application fee.
- You can’t understand the lease and the seller doesn’t want to answer your questions.
5
Get an appraisal. You want to know how much the house is worth, in case you agree to buy it at the end of the lease period.^{[8]
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Research source} Obtain a referral to an appraiser from your real estate agent. You can also search the directory of the American Society of Appraisers.
- Costs vary, depending on your location and the size of the home. Get a quote before hiring the appraiser.^{[9]
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Uncover serious (or minor) defects in the home now. It would be a shame to rent for two years and then find out the house has a major structural defect. Your real estate agent can recommend an inspector, who will probably charge $300-600 for an inspection.^{[10]
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Review the title report. A title report will tell you how long the seller has owned the house. Ideally, the seller will have lived in the home for several years. Someone who’s owned the house for a long time should have equity built up in the home and are probably more stable.^{[11]
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- Contact a title insurance company to get a copy of the title report.
8
Check if you’ll qualify for a mortgage later. You don’t need a mortgage now, while you are renting. However, you’ll need one later, if you choose to buy the house at the end of the lease period. Make sure your credit isn’t so bad you won’t qualify.^{[12]
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- A mortgage broker can review your credit history and predict whether you’ll qualify for a mortgage in a couple years.
- They also might have tips for improving your credit in the interim.
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Part 3

Part 3 of 4:

Negotiating a Contract

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Negotiate the purchase price. Your contract will need to identify how much you will pay if you choose to buy the house after the lease period. Generally, there’s two ways you can set the price:
- You can put the price in your agreement. Typically, you’ll set the price a little higher than the home’s appraised value to account for the increase in home prices. This is risky. The housing market might crash by the time you get ready to buy the home, but you still have to pay the amount in the contract.^{[13]
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- Alternately, you might decide to fix a price when the lease ends. For example, you can have a second appraisal done at that time.
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Pay for the option. The option gives you the exclusive right to buy the home during the option period. You’ll need to pay for this privilege, typically 3% of the purchase price. For example, if the purchase price is $150,000, then you’ll probably pay around $4,500.^{[14]
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- Typically, the option amount is set off against the purchase price. However, if you ultimately decline to buy the house, then you’ll lose the option payment.^{[15]
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Determine the length of your lease. Lease-to-own contracts typically last from two to five years.^{[16]
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- Look at your credit history. Some negative information, such as collection accounts, don’t fall off for seven years.^{[17]
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  Research source} Make sure the lease term doesn’t end before this negative information falls off.
4
Negotiate your monthly rent. The amount is typically higher than the market rate. This excess amount is called the “rent premium,” and it accumulates while you rent. If you decide to buy the house, then your rent premium is applied to the purchase price.^{[18]
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- For example, market rent might be $1,000. However, you’ll pay $1,250 a month. If the extra $250 accumulates for three years, you’ll have $9,000 to apply to the purchase price.
- If you don’t go ahead and buy the house, you typically lose this rent premium.
- Save copies of your rent checks, as they will make your mortgage process go much more smoothly.
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Divide up maintenance responsibilities. As the renter, you shouldn’t be responsible for all maintenance. However, you may need to be responsible for minor maintenance. Be very clear in the contract as to who will take care of what. Consider the following:^{[19]
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- Routine maintenance, such as raking leaves and mowing the lawn. Typically, the renter is responsible.
- Major repairs, such as fixing a leaking roof or replacing a broken heater. Usually, the homeowner is responsible.
- Property taxes. Usually, the homeowner should be responsible.
- Insurance. You should have renter’s insurance, and the owner should have homeowner’s insurance.
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Review your contract. The seller or buyer can draft the contract. If you’re in charge, you can use a sample contract online or hire a lawyer. At a minimum, you should have a lawyer look at the contract. Contact your nearest bar association for a referral to a lawyer.
- If the seller drafted the contract, pay particular attention to whether the agreement is a “lease option” or “lease purchase.” In a lease purchase agreement, you must buy the house when the lease period ends. The seller can sue you if you refuse.^{[20]
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- Instead of lease purchase, get a lease option, which gives you the option of buying.
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Part 4

Part 4 of 4:

Buying the Home

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Clean up your credit. You’ll probably need a mortgage to buy the house, so check your credit history. Get free copies of your reports from each of the three national credit reporting agencies and check them for errors. For example, an account from an ex-spouse might be listed as yours.^{[21]
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- Contact the reporting agency that has the incorrect information and dispute it.
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Check your credit score. To qualify for a conventional mortgage, you need a score of about 640.^{[22]
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Research source} If your score is too low, then try to raise it by aggressively paying down debts, in particular credit card debts. You can get a copy of your credit score in one of the following ways:
- Use a free website, such Credit.com.
- Pay for your FICO score at www.myfico.com.
- Meet with a housing counselor or a credit counselor, who can get your score.^{[23]
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- Check your online credit cards accounts or your monthly card statements.
Before your lease period ends, you need to tell the owner whether you intend to buy the house. Check your contract to see how you must notify them. If you’re not yet ready to purchase, you should talk to the owner about extending your lease.
4
Get pre-approved for a mortgage. A mortgage lender will analyze your finances (assets, income, and monthly debt obligations). You must complete an application and provide documentation, such as your bank statements and proof of income. If the lender approves you, they’ll send you a letter explaining the amount you can borrow.^{[24]
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- Seek preapproval two or three months before you intend to close on the house. After 90 days, the approval is no longer valid.
on your new home. The closing process is lengthy. Your lender will want an appraisal, inspection, and title report. You’ll need to review any disclosures from the seller about defects in the home. If all goes well, you should close about 45 days after you exercise your option.

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Tips

Consider other options before agreeing to a lease-to-own arrangement. Meet with a HUD-certified housing counselor to discuss all possible options, including government programs that help renters become homeowners.^{[25]
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Make timely rent payments. With some contracts, you lose all rent premiums you’ve accumulated if you miss even a single monthly payment.^{[26]
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