Rent to Own in Arizona

Rent to Own Credit Repair: What it Means for Your Home-Buying Goals

Purchasing a home is a big priority for many Americans, but not everyone is ready to sign the contract on a traditional home loan. If you’ve been following our rent-to-own series, you’ve hopefully learned some alternatives to the traditional home-buying process. Now, we’ll take a closer look at rent-to-own credit repair and give you a realistic picture of your next steps.

Do you want to brush up on your knowledge of rent-to-own programs? Chapter 2 and Chapter 4 provide in-depth overviews of different options and show how your contractual obligations change in each rent-to-own scenario.

Now, let’s take a closer look at the implications of the rent-to-own process on your individual credit history and future credit score.

Table of Contents

Table of Contents

Is it a good idea to do a rent-to-own program?

Applying for a rent-to-own program can be a good step for individuals who need extra time to secure their financial situation before closing on a house. There are many options available, including those that offer:

The purchase of a home through a third party program with a guaranteed rental period
The exclusive right of a buyer to buy a home they’ve rented for a set time
One-on-one, seller-financing options instead of a traditional mortgage
Leasing options that designate a certain portion of rent toward a home purchase

If you’re considering the rent-to-own process, it’s always important to distinguish the stable programs from the risky ones. Participating in rent-to-own can be a good idea for buyers who understand their risks and legal obligations. Unfortunately, there are also many scams that try to take advantage of the system.

Before you can answer whether a program is right for you, be sure to eliminate some of the common pitfalls and warning signs. In rent-to-own scenarios, these red flags could include:

Lots of fine print and legal jargon included in the contract
Extra responsibilities for the tenant, especially with maintenance and upkeep
Promises that sound too good to be true, or have no documented proof
Additional high fees that a tenant may forfeit if they can’t eventually buy the home

Whether a rent-to-own program is the best choice depends on several factors. These include having access to a responsible and trusted real estate expert, as well as choosing a reputable program with transparent contracts. Don’t be afraid to walk away from rent-to-own scenarios that seem dishonest, mysterious, or highly unlikely.

Rent-to-Own Credit Repair for Prospective Buyers

It’s true that rent-to-own programs may provide a window of time in which you can build or repair your credit. Unfortunately, the simple act of being in a rent-to-own contract and making consistent payments doesn’t improve your credit score.

Many people use rent-to-own programs not only for houses, but also for electronics, furniture, and cars. While timely payments on these items certainly act in your favor, they may not necessarily show up on a credit report. Since rent-to-own contracts are not traditional credit activities in the sense that traditional loans are, they are not reflected in credit bureau reporting the same way.

That being said, rent-to-own credit repair is certainly possible during the duration of a lease. If, in your rental or waiting period, you take additional steps to improve your credit, the rent-to-own process could be an indirect benefit. Many renters choose to use the leasing period as a way to save cash and stay up-to-date on other payments.

Characteristics of Good Credit

As you ponder rent-to-own success stories, you may want to be one of them! This means that you intend to use your leasing timeframe to build a healthier financial future. You may be wondering, “What makes a strong credit score?”

Credit scores above 700 points are considered strong. Common characteristics include:

On-time payments. According to NerdWallet, about 35% of your overall FICO score focuses on whether you pay your bills on time. Setting up auto-drafts and recurring payments can help you avoid the dreaded missed deadline.
Big-picture debt. What is the total sum of the debt you owe in loans and other sources? The ratio of owed debt to available credit is important to your credit picture.
Closed and open accounts. Occasionally, it’s tempting to close down accounts once you’ve paid them off. Surprisingly, age is a key factor in a healthy credit score. If you pay off an account, keep it open or make minimal purchases each month.
Amount of Credit available. The important thing to consider here is that you don’t want to max out your credit. If you have credit cards with maxed credit limits it destroys your score. Start with the smallest balance and pay it off, then shred that card, but don’t close the account. This will mean you have credit, but aren’t using it. Credit agencies love that.
Length of Credit History. The length of time you’ve had credit lines available.

Characteristics of Poor Credit

Credit scores are grouped together in different categories. While 650-700 is considered fair, 600-650 is bad, and below 600 is very bad. Individuals with low credit scores often miss payments, have debts in collections, or have high debt-to-income ratios.

Surprisingly, having a very short history of credit can also have a negative impact on a buyer’s score. While poor credit doesn’t necessarily mean an individual will be denied a new loan, interest rates can be significantly higher. This is due to the assumed risk that a lender takes on when an applicant has a poor history of on-time payments or extensive debt.

How do I repair my credit before buying a home?

Rent-to-own credit repair may take place in stages. You may decide to tackle small debts or issues first while you get settled in your rent-to-own arrangement. If you’re using the time to prepare for an eventual home loan, there are a few things you can do to get your credit in better shape.

Review your personal credit report and get a realistic sense of your standing
Begin to make all payments on time, even if they are minimum amounts
Minimize credit inquiries and new applications, which can hurt your report
Pay down as much outstanding debt as possible to lower your debt ratios
Update all employment and personal information for accurate reporting
Utilize the resources available to you through credit reporting agencies. Experian is one of the primary credit reporting entities that lenders check. They’ve built tools you might find useful, like Experian Credit Builder.

Do I need to make a downpayment in a rent-to-own program or contract?

In short, the answer to whether you need to put cash down in a rent-to-own contract is no. The benefit of these programs is that you don’t need to qualify for a mortgage right away, which means more time to save for a down payment at a later point.

There are some types of rent-to-own contracts in which down payments are included or mentioned. For instance, in a Lease-Purchase agreement, a down payment is required but does apply to the eventual purchase.

Since this benefit is not the case in every type of rent-to-own program, it’s important to understand how the contract addresses any equity in the house. Some monthly rent payments are just that – monthly rent without equity perks.

Can I buy a house with no money down?

Occasionally, buyers are eager to purchase a home but don’t have substantial cash savings to offer upfront. If you’re in a similar position, you may want to learn more about zero-down mortgages.

Unfortunately, modern banks are less likely to offer these types of mortgage loans. The risks are certainly higher, and not only for the bank. These situations stick the homeowner with a higher monthly payment and less equity in the home.

If you’re in a special group, you may be eligible for a VA home loan or a USDA home loan. These loans offer no down payment options for veterans and low-income individuals with established credit scores.

Can I buy a house without a credit check?

Whether home buyers like it or not, credit checks are a standard part of the home-buying process. Not only is this designed to protect the seller or builder, but it also protects the buyer. Buyers with a steep debt history may not be financially able to take on a high mortgage payment, and doing so could create a cycle of late payments and financial harm.

If a credit check reveals that a buyer has no credit history or a very short credit history, there are some helpful alternatives. These include:

Documenting a payment history on recurring bills, like utilities
Establishing a strong track record of employment and rental housing
Applying for an FHA loan instead of a conventional home loan

Repair Your Credit to Buy the Home of Your Dreams

The rent-to-own credit repair process can sometimes feel like an uphill climb. But with the right tools and knowledge, any potential home buyer can use a rental period to their advantage. This is especially true when it comes to raising a credit score, with the hopes of securing a future home loan.

If you’re still searching for the perfect alternative mortgage solution, the team at CENTURY 21 Northwest Realty can provide professional and trusted advice. We can help you wade through complicated terms and real estate jargon to help you find the perfect home for the next chapter of your life.

Find out if you qualify by clicking here

Do You Qualify For A Rent-To-Own Program?

LEARN MORE