Rent-to-own agreements sound like a win for buyers who need time to save money or fix their credit. You get to move into your future home right away, build up purchase credits with each monthly payment, and lock in a price. But there’s a catch most people don’t see coming: what if your landlord stops paying the mortgage on the house you’re renting to own?

This scenario happens more often than you’d think. While you’re making every payment on time and treating the place like it’s already yours, the seller might be falling behind on their mortgage. When that happens, the bank can foreclose, and you could lose everything you’ve invested, even though you did nothing wrong.

Let’s walk through exactly what happens in this situation and, more importantly, how you can protect yourself before signing any rent-to-own deal.

How Rent-to-Own Contracts Actually Work

A rent-to-own agreement combines two separate contracts. The first part is your standard lease, covering things like monthly rent, maintenance responsibilities, and how long you can stay. The second part is your option to purchase, which gives you the exclusive right to buy the property at a set price within a certain timeframe, usually one to three years.

You’ll pay two main costs upfront and ongoing. First is the option fee, typically 2% to 5% of the home’s purchase price. On a $300,000 house, that’s $6,000 to $15,000 paid at signing. This fee is almost always non-refundable. It secures your right to buy and is your first big investment at risk.

Second is the rent premium, the extra amount above normal market rent that gets credited toward your down payment. If market rent is $2,000 but you pay $2,400, that extra $400 each month goes into a credit account. Over two years, that’s $9,600 in purchase credits.

Here’s the critical part most people miss: the seller still owns the property until you exercise your option to buy. That means they’re responsible for the mortgage, property taxes, and insurance. You’re making payments to them, not to their bank. If they pocket your money instead of paying the mortgage, you’re in trouble.

What Happens When the Seller Defaults

The nightmare usually starts with a notice taped to your front door or arriving in your mailbox. The seller’s mortgage lender has declared them in default and started foreclosure proceedings. You might have been paying rent on time for months or even years, completely unaware the seller stopped making mortgage payments.

Once foreclosure starts, the timeline depends on your state. Judicial foreclosure states like Florida, New York, and Illinois require the lender to go through court, which can take six months to two years. Non-judicial foreclosure states like California, Texas, and Georgia let lenders foreclose without court involvement, often wrapping up in three to six months.

Either way, the property eventually gets sold at a foreclosure auction. A bank, investor, or new buyer takes ownership, and your rent-to-own agreement doesn’t transfer with the property. The new owner didn’t sign your contract and has no legal obligation to honor it.

You do have one federal protection. The Protecting Tenants at Foreclosure Act, made permanent in 2018, requires the new owner to give you at least 90 days’ notice before making you leave. If you have a valid lease, you can stay until it expires. But this law only protects your right to remain as a tenant temporarily. It doesn’t protect your right to buy the home or recover your option fee and rent credits.

The Financial Hit You’ll Take

Let’s look at what you actually lose. Say you paid a $10,000 option fee upfront, then contributed $400 per month in rent premiums for 18 months. That’s another $7,200. You’re now out $17,200, plus whatever you spent on improvements, thinking this would be your forever home.

The new owner who bought the property at foreclosure auction isn’t bound by your original purchase price either. If you locked in at $300,000 but the market has climbed to $340,000, you’d need to negotiate a new deal at current market rates. Your accumulated credits don’t transfer.

Most frustrating of all, you were the only person making payments correctly. The seller received your money every month and chose not to pay their mortgage. Yet you’re the one who loses everything.

Your Legal Options After a Default

You have three main paths forward, though none are guaranteed to work.

Sue the seller for breach of contract. The seller promised to maintain clear title and failed. You can sue to recover your option fee, rent credits, moving costs, and other damages. The problem is obvious: a seller in foreclosure is broke. Even if you win a judgment for $20,000, collecting that money from someone who couldn’t make mortgage payments is nearly impossible. You might spend $5,000 in attorney fees to win a judgment you can never collect.

Try to buy directly from the lender. Before or after the foreclosure auction, you can approach the bank about purchasing the property. Some banks would rather sell directly than deal with an auction. The catch is you’ll pay current market value, not your original contract price. You’ll also need to qualify for a mortgage immediately, which defeats the whole purpose of doing rent-to-own in the first place. Plus, your option fee and rent credits are gone. You’re starting from scratch.

Exercise your right to cure the default. This option only works if your contract includes a “right to cure” clause, which most don’t. If you have this clause, you can pay the seller’s overdue mortgage balance directly to the lender, bringing the loan current and stopping the foreclosure. This keeps your rent-to-own deal alive. The downside is you might need $15,000 or more immediately to cover missed payments, late fees, and legal costs. You’d then need to subtract that amount from what you owe at closing or negotiate with the seller to reimburse you, assuming they ever have money again.

Protecting Yourself Before You Sign

Smart tenant-buyers treat rent-to-own like buying a house, not renting an apartment. That means doing serious homework before you hand over any money.

Run a complete title search. Hire a title company to search public records for liens, judgments, or other claims against the property. This typically costs $200 to $400. You need to know exactly how much the seller owes on their mortgage and whether they have other debts secured by the property. If they owe $280,000 on a house they’re selling you for $300,000, that’s tight but workable. If they owe $320,000, walk away. They’re underwater and foreclosure is likely.

Verify the seller’s payment history. Ask the seller to authorize their mortgage servicer to share payment information with you. Get proof they’ve been current for at least the past 12 months. If they refuse this request, that’s your red flag. Someone current on their mortgage has no reason to hide their payment record.

Require an escrow account for rent credits. Don’t let your rent premiums go directly to the seller. Your contract should require these credits be deposited into a neutral escrow account managed by a title company or attorney. This costs $300 to $500 to set up, but it protects your accumulated credits. If the deal falls apart, the escrow company releases your credits back to you instead of the seller spending that money.

Record your option to purchase. This is the single most important protection. Take your signed contract or a memorandum of option to your county recorder’s office and record it. Recording fees run $25 to $100. This puts the world on notice that you have a contractual interest in the property. Some states like Maine, Illinois, and Maryland actually require this recording. While recording doesn’t automatically stop a foreclosure, it creates a public record that can strengthen your legal position if you need to fight for your rights later. At minimum, it ensures the seller can’t secretly sell the property to someone else.

Include a right to cure clause. Your contract should explicitly state that if the seller misses any mortgage payment, you have the right to pay the lender directly and deduct that amount from your final purchase price. This gives you a legal path to save the deal if the seller stumbles financially.

Monitor the property title annually. Once a year, order a basic title search or property report to check for new liens or foreclosure filings. Many title companies offer this for $50 to $100. You want to catch problems early, not when the foreclosure sale is scheduled for next week.

Warning Signs the Seller Is in Trouble

Pay attention to red flags during your rental period. If the seller suddenly asks you to pay rent in cash instead of by check, they might be hiding income or juggling debts. If you receive notices from the HOA about unpaid dues, or if the property tax bill shows as overdue in public records, the seller is likely struggling with all their obligations.

Some sellers will ask to renegotiate your rent-to-own terms midway through, requesting a higher purchase price or extended timeline. While legitimate reasons exist for modifications, this often signals they need to extract more money from you because they’re in financial distress.

If you notice these signs, immediately order a new title search to check for foreclosure filings or new liens.

The Bottom Line on Seller Default Risk

Rent-to-own agreements offer a real path to homeownership for people who need time to prepare financially. But you’re essentially betting on the seller’s financial stability for one to three years. If they default, you lose money and time, even though you did everything right.

The key is treating this like a major financial transaction, because it is. Spend the $1,000 to $2,000 upfront on a real estate attorney, title search, and proper contract protections. Record your option. Use escrow for rent credits. Monitor the title annually.

These steps won’t eliminate every risk, but they dramatically improve your odds of actually owning the home you’re already calling yours.