Prospective homebuyers sometimes find themselves in the position of being emotionally ready to buy their first home but not quite financially prepared.

Whether the issue is a lack of down payment, a little too much debt. or a lingering ding on their credit report, sometimes buyers just have to wait while they work on their credit profile or save more money before they can buy a home. In such a case, a rent-to-own or lease-to-own arrangement can sometimes be a solution.

Rent-to-own agreements vary in their exact terms, but generally the property owners and renters sign a contract in which the renter agrees to rent the property for a specified time, typically one to three years. During that time, the renters usually pay an above-market rent, with the excess rent credited toward a down payment when the contract ends. The contract typically sets a price for the home at the end of the lease.

Benefits for Both Sides

A rent-to-own deal offers prospective buyers an opportunity to settle into a home they want to purchase while they continue to save for a down payment, improve their credit score, or wait for a negative factor on their credit report such as a foreclosure or a collection to fade into the past.