If you’re looking to buy a house but your credit is shaky, consider a rent-to-own agreement.

A rent-to-own agreement can be an alluring option for aspiring homebuyers who don’t yet qualify for a mortgage.

But if you’re contemplating going through the rent-to-own process, you’ll want to tread carefully. There are a variety of pitfalls associated with rent-to-own agreements.

Here’s a primer on how rent-to-own deals work and potential risks to be wary of before you commit.

What Is a Rent to Own Home?

A rent-to-own home is exactly what it sounds like: a two-step process in which you start off renting a place with the option to buy it later.

First, you rent a house with a lease agreement for a period of time, with some of your monthly payment going toward an eventual down payment. Once the lease expires, you have the option to purchase the property.

This is a strategy you might try in hopes that after several years of paying rent and saving for a down payment, a mortgage lender will find you a better credit risk.

How a Rent-to-Own Agreement Works

In a rent-to-own contract, individual homeowners typically enter an agreement with a real estate company for three years, with the option to extend a lease contract for four additional years. After those three years (or seven if you extend the contract), you would make payments to a mortgage lender instead of rent payments to a landlord.

A rent-to-own contract will include a lot of numbers, like your rent payment, the length of your lease, the time you have to buy the home, how much you will pay for the home when you’ve made the last rent payment and when you’ve made the last mortgage payment, potential rent credits and an option fee.

Here are some key things to know when considering a rent-to-own agreement:

• The option fee is an upfront cost that pays for the option to purchase the home. The option fee is between 1% and 7% of the home’s purchase price. It’s usually nonrefundable, but not all rent-to-own contracts require one. Option fees are also known as option money or option consideration.
• A rent credit is extra money you pay on top of the monthly rent. That extra money goes toward your eventual down payment to buy the house.
• The option fee and rent credit, in most cases (always check the contract), will be put in an escrow account and go toward your down payment.

Benefits of Rent-to-Own for the Seller

It’s clear why renting to own a house can be a good thing for the buyer, who might not be able to purchase a home otherwise. But what’s in it for the seller?

“The landlord … gets their house rented, with a knowledge that they won’t have to pursue putting it on the market and look for a buyer after a certain period of time,” says Shea Adair, a Realtor and real estate investor in Cary, North Carolina.

“The cost alone to redo a house after a tenant and then market it to sell to a new buyer is costly,” he adds.

Basically if you’re renting your home but thinking of selling it, this can be a nice way to collect rental income for a while before selling.

It also might be a good idea if you’re a seller with a house that isn’t in demand – but you have one interested buyer who can’t swing the financing yet.

With renting to own, you have a buyer, eventually. The tradeoff is simply that it’s going to take a while before you actually sell the home.

How to Find Rent-to-Own-Homes

If you’re looking for rent-to-own homes, here are a few strategies for trying to find the right one.

• Talk to a real estate agent. Give a real estate agent a call and explain your situation. They may have ideas for you outside of rent-to-own agreements, but the agent may immediately think of clients who have struggled to sell their home and would be interested in the rent-to-own model. Some real estate agencies such as Coldwell Banker Realty and Century 21 have their own programs that offer rent-to-own homes.
• Search rent-to-own home websites. These include HousingList, RealtyStore or iRentToOwn.com.
• Suggest your idea to a seller. Depending how things go, you could suggest a rent-to-own plan to a home seller. This probably won’t go over so well if the homeowner has a bunch of interested buyers. But if the house has been on the market for a while, the homeowner might be interested.
• Suggest your idea to a landlord. If there’s a house for rent that you’d love to own, you could suggest a rent-to-own agreement to the landlord. The worst they can say is no.