Rent-to-own can be a great alternative if you can't afford to buy a home outright, have a low credit score or don't have enough money for a  down payment. Rent-to-own contracts can also give you the chance to see how you like a home and neighborhood without committing  to buying it. Read on to better understand what rent-to-own means, how the process works and what you should know if you're interested.

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 What is rent-to-own?

Simply put, rent-to-own is where you rent a home for a certain period of time before you buy it. Depending on the terms of the contract,  That period can range from several months to several years. These contracts are different than a traditional renter's lease or purchase contract.

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 How does rent-to-own work?

As part of your rent-to-own contract, the seller agrees to put a certain amount of money from your monthly rent payment toward your equity  in the home.

There are two kinds of rent-to-own contracts: lease-purchase and lease option. With a lease option contract, you have the option to purchase the home after a time period you and the property owner have agreed upon. With a lease-purchase contract, you're legally  obligated to buy the home at the end of that period.

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 The rent-to-own basics

There's no one-size-fits-all approach with the rent-to-own process. However, rent-to-own transactions typically have several standard components, including:

• Purchase price: A rent-to-own contract typically specifies the home's purchase price. In some cases, the purchase price won't be determined until the lease expires.

• Rent payments: The contract will specify the amount of rent you’ll pay each month. Rent prices in a rent-to-own contract are usually higher than regular rental fees since the owner sets aside a portion of your monthly payment for use towards your future purchase of the home.

• Maintenance: The contract notes who is responsible for covering maintenance—you or the property owner. Make sure you understand what you're agreeing to repair if maintenance is necessary.

• Option fee: As part of a rent-to-own contract, you may be required to pay a one-time, non-refundable fee. This fee is usually a percentage of the purchase price, although there is no standard amount.

• Lease term: The contract will also specify the terms of the lease and how long you'll be renting before moving forward with a purchase.

• Closing process: You'll need to obtain financing at the end of the lease if you want to purchase the home. The money set aside from your rent payments may be credited to you at this point. Lenders may have guidelines that limit how much can actually be credited, such as only permitting the amount you can document was paid above market rent.

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How to rent-to-own a house

Once a seller has agreed to a rent-to-own contract, the steps you’ll take include:

• Sign a rent-to-own contract: Since there are two kinds of rent-to-own contracts, it's important you understand what you're agreeing to. Watch out for lease-to-purchase contracts, as you may be legally obligated to purchase the home at the end of your lease, whether you can afford it or not.

• Agree to a purchase price: You can get a general idea of local market prices by looking at similar listings in the neighborhood or nearby neighborhoods.

• Determine the rental term's length: Typically, the rental contract lasts between one and three years. Consider where you are financially and how long it will take you to be ready to qualify for a mortgage. If your credit score isn't where it needs to be to qualify for a good interest rate, you might want to consider a longer rental period to improve your credit.

• Define maintenance roles: Each rent-to-own contract is unique, so it's important to get in writing what you'll be responsible for as the renter. For example, are you responsible for only what's inside the home, such as appliances and other repairs, or are you also responsible for lawn maintenance and the AC unit?

• Rent payments: With a rent-to-own contract, the rent is usually higher than it would be in a normal renting situation. You might be able to negotiate the amount you pay, although it's important to get in writing exactly how much of your payment will go toward your property purchase.

• Shop for a mortgage lender: As the rental term for the property nears an end, you'll want to shop around for a mortgage as you would with any other home purchase.

• Keep Records: Retain copies of checks/bank statements or other documentation to prove what you have actually paid. This documentation may be required by your lender.

A rent-to-own contract allows potential homebuyers to move into a home right away while they save for a down payment or improve their credit score. That said, there are a number of factors to consider before you agree to this type of contract. Always make sure you understand the terms of your contract before you move forward with one.