I am going to lead with the part that costs people money.
A rent credit only counts toward a down payment if it is above market rent.
Not some of it. Not usually. That is the rule, in writing, at both agencies.
Fannie Mae's Selling Guide, section B3-4.3-12: the credit "may be no more than the difference between the market rent and the actual rent paid." The lender needs a lease of twelve months or more showing the monthly credit, proof the payments were made, and an appraisal stating market rent. FHA's Handbook 4000.1 says the same thing in its own language — the amount of the rental payment that exceeds the appraiser's estimate of fair market rent, applied toward the minimum required investment.
So run the numbers everyone is actually being sold.
The house rents for $1,500. The tenant-buyer pays $1,500 and is told $300 a month is "credited toward your down payment." Twenty-four months later they walk into a lender believing they have $7,200 built up.
The appraiser says market rent is $1,500.
They have zero. Not $7,200 reduced. Zero. The credit is the amount above market rent, and there wasn't any.
In most cases that is not a scam. It is ignorance, passed down through courses by people who never sat through an underwrite. But it ends the same way for the family living in the house.
If you are going to use this tool: either the rent is genuinely above market and documented, or you tell the tenant-buyer plainly that the credit is a discount on the purchase price and not down-payment money. One of those two. Never the fuzzy version in between.
I'm Rob Bergeron, a licensed Kentucky Realtor and the owner of Winner Realty in Louisville. Here is how the rest of it works.
The structure: two documents, kept separate
Document one: a lease. A standard residential lease, landlord and tenant.
Document two: an option. A separate agreement giving the tenant the right, not the obligation, to buy the property at a set price within a set window.
They stay separate for two reasons. A default on the lease can then be handled as a landlord-tenant matter rather than a real estate matter. And more importantly, merging them is how you accidentally create something else entirely.
Texas, for example, statutorily treats an option to purchase that is combined or executed concurrently with a residential lease as an executory contract, subject to heavy regulation — recording requirements, pre-signing disclosures, annual accountings, a buyer cancellation right.
Kentucky has no statute like that. I looked. That is not the comfort it sounds like — it means there is no safe harbor either, which brings us to the real Kentucky risk below.
The moving parts
Option consideration: typically 1–5% of the purchase price, non-refundable, credited to the price if the option is exercised. On a $280,000 house, roughly $8,400 at 3%.
Option term: usually 24 to 36 months. Long enough for a credit-repair plan to actually work, short enough that the seller is not stuck indefinitely.
Strike price: fixed at signing, or set by formula. Fixed is cleaner and it is what most tenant-buyers want. It also puts the market risk on the seller, so it should be priced accordingly.
Rent credits: see above. Be honest about them.
Maintenance: standard practice shifts routine maintenance to the tenant-buyer. Note that phrase — standard practice, not law. And in a URLTA county like Jefferson, you cannot hand the tenant your habitability duty. What can be shifted is narrow and needs its own written agreement.
Record a memorandum of the option. Kentucky's recording statutes are what put the world on notice, and an unrecorded interest is invisible to a buyer or a lender who comes along later. A notarized memorandum recorded with the county clerk is what stops a seller from selling or refinancing out from under the tenant-buyer. Have your attorney identify the right instrument — it is not the same statute used for a mortgage.
Lease option versus lease purchase, because people use these interchangeably and they are not the same. In a lease option, only the seller is bound; the tenant may walk. In a lease purchase, both are bound and the tenant is contractually obligated to close. Know which one you are signing.
The Kentucky risk
Kentucky treats installment land contracts as equitable mortgages. Under Sebastian v. Floyd (Ky. 1979), forfeiture clauses in those contracts are invalid as a matter of law and the seller's only remedy is a judicial sale.
Now look at what a badly structured lease option looks like on paper. A large non-refundable option fee. Heavy monthly "credits" toward the price. The tenant paying the property taxes. The tenant responsible for major repairs. A three-year term at a fixed price.
That is not a lease anymore. That is an installment sale wearing a lease costume — and if a Kentucky court reads it that way, you do not get a seven-day notice and a forcible detainer. You get a judicial foreclosure with a master commissioner, an appraisal, and a possible redemption period.
Being careful and honest here: I could not find a published Kentucky opinion recharacterizing a true lease option as a land contract. So this is a risk, not a holding, and I am not going to dress it up as settled. But the line is visible from where Sebastian sits, and the further a deal drifts toward tenant-pays-everything with heavy credits, the closer it stands to that line.
The defense is simple: keep it looking like what it is. Market-ish rent. Modest, honest credits. Landlord keeps taxes, insurance and major repairs. Separate documents. Recorded memorandum.
Landlord-tenant law, which most investors here get wrong by one step
Kentucky's Uniform Residential Landlord and Tenant Act is local-option. KRS 383.500 lets cities and counties adopt it in its entirety and without amendment. Jefferson County has. Fayette, Oldham and Pulaski and a number of cities have. Bowling Green and Owensboro have not. Southern Indiana is outside it entirely.
Where URLTA applies: nonpayment requires a seven-day written notice; other material breaches get a fourteen-day notice with fifteen days to cure.
Security deposits under KRS 383.580 must be held in a separate account, the tenant must be told the bank and account number, and move-in and move-out damage lists are required — and a landlord who does not follow the account and list rules forfeits the right to retain any of the deposit.
Which means: keep the option consideration and the security deposit as separate, separately documented funds. They are different money with different rules, and commingling them is a self-inflicted wound.
Fair Housing, and this one is not optional
Screening a tenant-buyer is rental screening and credit screening at the same time.
Federal protected classes: race, color, national origin, religion, disability, sex, familial status. Louisville Metro added four more in December 2020 — source of income, arrest and conviction history, homeless status, and prior military service — and has protected sexual orientation and gender identity since 1999. HUD reads federal "sex" to cover both.
The local list is longer than the federal one. Pull the current Metro ordinance and keep it next to your screening criteria.
Source of income is the one that trips people up here. And on criminal history: no blanket bans. If you consider it at all, it has to be an individualized look at what happened, how long ago, and whether it bears on tenancy — written down before the first applicant, not decided in the moment.
That is the whole rule. Written, uniform, applied to everyone. If your screening standard is not on paper before the first applicant, it is not a standard, it is a preference, and a preference is what a complaint is made of.
Due-on-sale applies here too
Garn-St Germain exempts "the granting of a leasehold interest of three years or less not containing an option to purchase."
Read that clause carefully. A lease with an option is expressly outside the safe harbor. The lender may accelerate. It is rare, but do not tell a seller it is impossible.
The honest outcome data
Pew found that 2.4 million American adults had used lease-purchase agreements, and that only 64% of them owned a home by 2021 — against 80% of people who used a mortgage.
Two-thirds of those agreements had no fixed purchase price. Twenty percent had balloon payments. Forty percent of buyers were paying the property taxes.
The institutional operators have had a rough three years. Divvy Homes raised around $400 million, went through three rounds of layoffs, and sold to Maymont Homes in January 2025 in what was reported as a fire sale. Blackstone shut down Home Partners of America as a standalone in February 2025 and folded it into Tricon; Moody's data showed that of its 2020 move-ins, 513 bought and 843 left without buying. Landis is facing a federal RICO class action filed in October 2024 alleging a "built to fail" model — allegations, not findings, and I will say that clearly. And in June 2025 Pennsylvania's Attorney General secured $992,000 from an entity tied to Vision Property Management over lease-with-option contracts on dilapidated and foreclosed homes, with homes deeded outright to roughly 250 consumers by court order.
The National Consumer Law Center's assessment of the category is two words: built to fail.
I am not telling you that to talk you out of it. I am telling you because the difference between the operators who got sued and the ones who did not is entirely in the structure — recorded options, honest credits, fair strike prices, habitable houses, and a tenant-buyer with an actual path to a loan. Every one of those is a choice made at signing.
Who this is actually right for
Sellers with little or no equity who need the payment covered and cannot clear a commission at today's price. Owners relocating who cannot sell. Tired landlords who want a maintenance-light exit with a buyer already in place.
There are more of those in Louisville right now than there were two years ago. Louisville's median days on market runs in the high thirties, so a listing sitting past ninety days is a genuine outlier — and six months in, that is not a pricing problem anymore, that is a conversation.
Buyers: self-employed people with two years of returns that do not tell the real story, and people with a fixable credit issue and a documented plan. The median credit score on a new mortgage is up around 775 now, with the tenth percentile at 650. There is a whole tier of capable buyers sitting under that line who are not bad risks — they are just not bankable this year.
When not to use it: when the tenant-buyer has no realistic path to qualifying, when the house has habitability problems, when the seller cannot cover the mortgage if the tenant stops paying, when the strike price is above market, and when the deal only pencils because the tenant is paying taxes and major repairs. That last one is not a lease option. That is a land contract in disguise.
If you are the tenant-buyer reading this
Three things to insist on before you sign anything.
The strike price at or below what the house appraises for today. If it is above market, you are being asked to make up the difference before you even start.
The rent credit in writing, with the market rent stated — and understand that only the portion above market rent will count with a lender. If the seller will not put the market rent figure on paper, that tells you something.
A lender who has already looked at your file and given you a written plan and a timeline. Not a promise that it will work out. A plan. If nobody will pre-screen you, the option term is probably not long enough to fix what needs fixing, and your option money is what pays for finding that out.
And get the memorandum recorded. It is the only thing standing between you and a seller who sells to somebody else.
The reason it is in the toolbox at all
A lease option is the answer when the seller cannot discount and the buyer cannot qualify.
That is a deal that does not exist under any other structure — not an assignment, not a novation, not a seller carry, not an assumption. Two people who both want the same outcome and neither of them can reach it today.
Time and circumstance. That is the whole business. The tool is not good or bad; it is right for a narrow situation and wrong everywhere else, and the skill is knowing which one is sitting across the kitchen table.
Frequently asked questions
Do rent credits count toward a down payment?
Only the portion of rent that exceeds market rent. Fannie Mae's Selling Guide B3-4.3-12 states the credit "may be no more than the difference between the market rent and the actual rent paid," and FHA applies the same standard. A credit carved out of a market-rate rent payment is worth nothing at the lender.
Is rent-to-own legal in Kentucky?
Yes. Kentucky has no statute specifically regulating lease options, unlike Texas and a handful of other states. That also means there is no safe harbor, so structure matters — a lease option loaded with heavy rent credits and tenant-paid taxes and repairs risks being read as an installment land contract, which Kentucky treats as an equitable mortgage requiring judicial foreclosure.
How much is the option fee on a lease option?
Typically 1–5% of the purchase price, non-refundable, and credited to the price if the option is exercised. On a $280,000 house that is roughly $8,400 at 3%. It should be documented separately from the security deposit, which is governed by different rules.
Does Kentucky's landlord-tenant act apply to my rental?
Only if your city or county adopted it. KRS 383.500 makes the Uniform Residential Landlord and Tenant Act local-option. Jefferson County has adopted it, as have Fayette, Oldham and Pulaski counties and several cities. Bowling Green and Owensboro have not, and Southern Indiana is outside it entirely.
Can a lender call the loan if I do a lease option on my house?
Possibly. Garn-St Germain exempts a leasehold of three years or less that does not contain an option to purchase — so a lease with an option falls outside that protection and the lender retains the option to accelerate. It is uncommon in practice, but it should be disclosed rather than dismissed.
What percentage of rent-to-own buyers actually buy the house?
Pew found that only 64% of adults who used lease-purchase agreements owned a home by 2021, against 80% of people who used a mortgage. Data from one large institutional operator showed 513 buyers against 843 who left without buying among a single year's move-ins. Structure is the main variable.
Related reading
Seller financing and land contracts in Kentucky · Assumable mortgages in Louisville · Novation agreements in Kentucky