If you’re a renter, owning a home of your own is challenging. You’re paying monthly rent to a landlord instead of saving it or earning equity in your own home. If this describes your situation, rent to own housing may work for you. While rent-to-own housing is ideal for many renters who don’t have a hefty down payment saved, your credit score tips is still a factor, and bad credit can still harm your chances of getting into your first-choice home.
How Bad Credit Affects Rent To Own Mortgages
While rent to own housing is a fantastic path to a more secure, long-term housing situation, your credit score is still a factor. Experts advise a minimum credit score of 620 for rent to own mortgage qualification, but that number can vary based upon the location and housing market.
As with a traditional home loan or auto loan, people with higher credit scores typically secure better interest rates. Better interest rates mean lower costs overall, which means you own your home faster in a rent to own housing situation.
Regardless of your score, it’s in your best interest to improve it prior to pursuing a rent to own arrangement.
Credit Repair Tips for Rent To Own Applicants
Your credit repair tactics should depend largely upon your timeline. If you need to make a move quickly (you’re losing your current housing situation, you’ve moved for a new job), you’ll want to address items that impact your credit quickly. If you’ve got some time, you’ll also want to focus on actions that will improve your score over time.
Step 1: Remove Bad Marks on Your Credit Report
Once you acquire your credit report (this is free), you’ll want to look for anything in collections. Whether it’s a debt you legitimately owe or not, that bad mark significantly impacts your credit score, resulting in bad credit. Your first step in becoming debt free and qualifying for a better mortgage rate is to remove those bad marks. This consists of three actions: dispute any inaccuracies immediately, pay off or start making payment arrangements for legitimate debts, and check back weekly to ensure the collections account is pulled from your credit report when it’s supposed to be.
Step 2: Pay Down Credit Card Debt
Even if you’re only paying the minimum due on your credit cards, paying down your credit cards can have a fast impact on your credit score. You should always pay at least the minimum and avoid charging up the cards you’re paying down. To make maximum impact, consider the avalanche method, the snowball method, and debt consolidation.
Step 3: Get Added to an Account in Good Standing
Do you have a parent, spouse, or friend who has a high-limit credit card with a low balance? If you get added as a user on that account, you can ride on the coattails of their success. This is especially impactful if you’ve got a high credit utilization percentage (meaning you’re using most of the credit available to you). You don’t even need to have or use the account (credit card) provided, which can assuage fears when you’re asking someone to extend this favor. This should impact your credit quickly.
While it might not be realistic for you to be entirely debt free prior to your rent to own housing application, you can make some credit repair improvements to get a better interest rate.
