When a buyer enters a lease-to-own agreement on a home, he enters the arrangement with the intention of purchasing the house. Although he will be renting the home for a period of time before closing on the purchase, his rent payment will be somewhat higher than market value, and he will offer a considerable deposit which may not be refundable should he not complete the purchase of the home. When the buyer signs the lease, he will also be asked to sign a separate sales contract, much like the contract used for traditional sales, which outlines the purchase agreement for the property. For this reasons, it is important for the the buyer to carefully evaluate the home and negotiate an appropriate purchase price before signing any lease-to-own contract.
The Buyer Leases the Home
After moving into the home, but before closing on the purchase, the buyer leases a lease-to-own house for a period of time. A typical lease period is approximately 12 months, though some lease periods may be as short as six months, and some may extend to three, four or even five years. While the buyer is leasing the home, he may make lease payments that are somewhat higher than the house's market value; the additional funds paid each month are set aside by the seller to be used toward the down payment at the actual sales closing. This arrangement typically works out well for the seller, who may collect very high rent payments while renting a home to a tenant who is likely to treat the property as his own, and for the buyer, who enjoys the maintenance-free convenience of renting while saving money for a down payment and resolving any outstanding credit issues.
The Seller Purchases the House
After the period of leasing, the buyer contacts a mortgage lender to arrange financing for the purchase of the house. He may be required to order and pay for a home inspection, though some lenders may agree to treat the loan as a "refinance" in which no inspection is necessary. When the loan closes, the seller contributes the buyer's initial down payment (made at the beginning of the lease), security deposit and any funds collected through rent payments as credits toward the purchase down payment; this contribution typically amounts to somewhere between five and 10 percent of the house purchase price, allowing the loan to close without additional funds from the buyer. Once the purchase closes, the buyer assumes ownership of the property and the lease-to-own process is complete.
Some Buyers Walk Away
For various reasons, some buyers are unable to complete the purchase of their lease-to-own home. If the buyer should decide not to buy the house, she can simply notify the seller and move out when the lease term expires. While abandoning a lease-to-own purchase agreement rarely has an adverse effect on the buyer's credit rating (most lease-to-own agreements have an "out" for the buyer), a tenant who does not complete the purchase may lose any initial down payment and security deposit, as well as any funds collected through higher rent payment.
