You either own your home, or you rent. Right? Wrong. There is a third option -- lease/purchase -- that most people overlook.

Over the years, lease/purchase developed a bad name as the Pandora's Box of home financing, rife with ambiguity, legal twists and troubling outcomes. But Fannie Mae, Freddie Mac and numerous state agencies and nonprofit organizations are working to restore the practice's reputation. Used properly, lease/purchase programs can turn lease agreements into mortgages "and move families from rental housing into stable and affordable homes that they own," explains Mark Vanderlinden, Fannie Mae's director of community lending for the southwest region, in Dallas.

According to HUD's online glossary, a lease/purchase agreement "assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment." The major problem is there is no such thing as a "standard" lease/purchase contract, so the seller and buyer (the lessor and lessee) must create one. Historically, many of these private, individualized contracts have failed to spell out enough details or "contingencies" to make them workable. This means that lawyers, judges or juries resolve a high percentage of private lease/purchase arrangements.

The lease/purchase programs backed by Fannie Mae, Freddie Mac, and other housing authorities and agencies are different. These special programs are designed to help more low- to moderate-income workers become homeowners with a degree of safety that cannot be found in most traditional lease/purchase agreements. Everything is spelled out up front, and the buyers often get an education and a cleaner credit history in the process.

The main difference between traditional lease/purchase programs and these new ones is that the newer programs clarify one key issue: "Who owns the house?" In a traditional plan, the seller owns the home until the sale is finalized. In the new plan, a housing authority or a nonprofit agency buys the house from the original seller and then holds title to the property until the buyer can convert that lease/purchase agreement into an actual mortgage.

"Here's an example from a program we're running in El Paso," Vanderlinden says. "We have a nonprofit agency building a subdivision here targeting immigrant families -- people who are here legally. But they can't document their good credit history. The nonprofit gets a loan from a Fannie Mae lender and counsels the borrower during this time. The borrower is putting down some money, in this case, about $3,000. The borrower makes a regular payment to cover the mortgage, works with the nonprofit to get his or her credit documented and clean, and then assumes the loan. The lender will determine when the borrower can assume it, and the typical guidelines that must be met. We're dealing with people with no credit history, or a bad credit history, but not so bad that it can't be cleaned up within two years."

Vanderlinden points out that some housing agencies and authorities "are developing their own subdivisions, or working directly with borrowers. Typically, a housing authority or other entity is getting a loan from a Fannie Mae lender and our borrowers are tenants. They can actually 'buy' in as little as one year or it could take as long as five years. We like to see it happen in one to three years." So do the buyers, since they cannot deduct the interest they pay until it becomes actual mortgage interest. Until the lender is satisfied with a buyer's ability to pay, the housing authority maintains title to the house. As long as the housing authority owns the house, the "buyer" is just a renter.

"We've done a number of pilot programs that have also let the borrowers do some credit repair while they were going through the process," Vanderlinden adds. "The way these have worked is that typically a really strong nonprofit or housing authority has come in. It has to be some entity that can provide the initial funding and that can either also do credit counseling, or bring in someone who can." He explains that many of the people they deal with "are un-banked. They have jobs, but they don't even use checks. If they use money orders, we hope they keep the receipts. Many of them don't know what a credit history or FICO score is. We teach them. We teach people how to use credit."

Fannie Mae has roughly a dozen such pilot projects going on around the nation. Freddie Mac operates similar programs, as do independent and nonprofit housing authorities and agencies, and government-subsidized housing entities. But how do you find them? First, look up Fannie and Freddie, at www.fanniemae.com and www.freddiemac.com. Then check the nonprofit housing authorities or agencies, or any government or private organization involved in housing issues.

If you can't locate one of the programs we've mentioned, you might research traditional lease/purchase options and compare the contract the seller offers you with those used in the programs backed by Fannie and Freddie. You also should have a real estate attorney check any lease/purchase option struck between two private parties to ensure that all possible points of contention are covered so there are no loopholes.

A lease/purchase contract really does create a third option for potential homeowners, one that truly bridges the gap between buying and renting. Since there is no standard lease/purchase contract, going that route requires you to do more research and take more care when it comes to shopping for a deal. But there are lease-to-own financing deals out there. You just have to find the one that works for you.