By Grant Edrington – Updated June 19, 2023

If you have bad credit* but dream of owning a home, you might be wondering if there’s a way to make that dream a reality. The good news is that there is a possible solution: rent-to-own. Rent-to-own is a unique solution that allows you to rent a home with the option to buy it later. What makes it even more attractive is that it’s possible to enter into a rent-to-own agreement even if you have below-average credit. 

We’ll explore how you can navigate the rent-to-own process and increase your chances of securing your dream home, despite a less-than-perfect credit history. In this article, we’ll answer the following questions:

• Does Rent-to-Own Require a Good Credit Score?
• How Does Rent-to-Own Work With Bad Credit?
• Does Rent-to-Own Hurt Your Credit?
• Can Rent-to-Own Improve Credit Scores?
• How Can I Improve My Bad Credit?

*Per Experian, a bad credit score is below 670. While it’s possible to become a homeowner with a bad credit score, getting approved for a mortgage may be difficult.

Does Rent-to-Own Require a Good Credit Score?

Depending on the program you choose, the credit score requirements for rent-to-own programs can vary, but they are often more lenient than those of traditional mortgages. 

Here at Divvy, for example, one of the requirements we look for is that applicants have a credit score of at least 550. By comparison, traditional mortgages typically have stricter credit score requirements, often requiring scores above 620. FHA loans, on the other hand, may accept credit scores as low as 500 with the caveat that applicants pay a higher down payment of at least 10%. However, if you’re applying for an FHA loan and have a credit score of 580 or higher, it can open the door to a lower, 3.5% down payment. 

Additionally, VA loans, designed for military service members, veterans, and their spouses, may have more flexible – but not necessarily lower – credit score requirements.  Although the VA loan program requires no set minimum score, lenders set their own minimums and typically look for a score in the 600 to 650 range.¹

But keep in mind that Divvy doesn’t just look at your credit score alone. We take a bigger-picture approach and consider other important factors like your income stability, employment history, rental history, and other existing monthly payments. 

Buying a home can be exciting, but can also feel like a big step for some. If you’d prefer to just rent, here are some tips on how you can rent a house with bad credit.

How Does Rent-to-Own Work With Bad Credit?

Even if you have bad credit, rent-to-own is still a feasible option because these programs often take a more relaxed approach to determine one’s ability to repay. Here are some common requirements for rent-to-own programs that can help people with bad credit pursue homeownership:

Flexible credit score requirements

Rent-to-own programs are often more lenient with credit scores compared to traditional mortgage lenders. While specific requirements may vary, some programs accept applicants with lower credit scores; as mentioned previously, Divvy accepts credit scores as low as 550.

Larger down payment or option fee

Rent-to-own agreements often require a larger down payment or option fee upfront compared to a rental. The larger down payment is also meant to be an initial contribution, as well as your commitment to the property.

Demonstrated income and stability

Rent-to-own programs typically consider your income and employment history. Showing consistent and stable income, even if your credit is less than ideal, can strengthen your application.

Rental and payment history

Providing a positive rental history with on-time payments can demonstrate your ability to meet financial obligations. Rent-to-own programs often take this into account when assessing applicants.

Clear financial plan

Having a clear financial plan and demonstrating your ability to meet future mortgage payments is imperative. Rent-to-own programs may consider factors such as your current financial situation and your prospects for improving your creditworthiness over time.

Remember, each rent-to-own program will have its own specific requirements, so it’s important to research and understand the details of the program you’re considering. While bad credit can present some challenges, rent-to-own offers an opportunity to work toward homeownership while improving your credit standing.^2,3,4

Does Rent-to-Own Hurt Your Credit?

Rent-to-own won’t hurt your credit or have a negative impact unless you miss a payment or default. In fact, it can help you improve your credit if you handle it responsibly. If you’re in a rent-to-own agreement, be sure to make your monthly payment on time and manage your debt and credit utilization responsibly to help keep your credit score in good shape.

Can Rent-to-Own Improve Credit Score?

Rent-to-own has the potential to boost your credit score if you make a serious commitment to repairing your credit throughout the process. Here’s how:

Paying on time

Making your rent payments on time during the rent-to-own period shows lenders that you’re reliable. When reported to the credit bureaus, this positive payment history can have a favorable impact on your credit score.

Building payment history

Rent-to-own agreements sometimes report your rental payments to credit bureaus. This helps establish a solid payment history, which is a critical factor in credit scoring. Consistent on-time payments can demonstrate your creditworthiness.

Credit guidance

Many rent-to-own programs offer credit counseling and guidance to help you improve your credit. They provide tips on managing your finances, reducing debt, and building good credit habits. By consistently meeting payment obligations and following the credit improvement strategies recommended by the program, you can work toward rebuilding your credit. ⁵

Managing debt

By reducing your debt and keeping your credit utilization low, you can positively impact your credit score. Lowering your overall debt shows lenders that you’re in control of your finances.

How Can I Improve My Bad Credit?

If you want to be considered for more rent-to-own programs, it’s helpful to take steps to improve your bad credit. Here are some ways to do it:

• Check your credit reports regularly to track your progress and dispute any errors.
• Sign up for credit monitoring services to stay updated on changes in your credit score.
• Set up autopay for your credit cards so you never forget to make a payment.
• Consider making credit card payments twice a month to lower your credit utilization.
• Pay down your debts to reduce your overall debt-to-credit ratio.
• Avoid applying for too many new credit accounts at once, as each application can temporarily lower your credit score.
• If you’re struggling financially, talk to your creditors about repayment options or debt consolidation.^6,7

By following these steps, you can gradually improve your bad credit and may increase your chances of qualifying for different rent-to-own programs or even a mortgage. Remember, improving your credit takes time and effort, but it’s worth it for the opportunities it can open up.

Divvy’s Rent-to-Own Program Could Be Your Path to Homeownership

Divvy’s rent-to-own program could be a great option for folks with lower credit scores who want to become homeowners. Read about some of the main details of the program and learn the main differences between rent-to-own and mortgages:

Lower credit requirements

Alongside other factors that determine eligibility, Divvy may accept applicants with credit scores as low as 550, making it accessible for those with lower credit.

Credit-building support

Divvy provides credit counseling services to help tenants improve their credit during the lease.

Path to ownership

With Divvy, a portion of your rent can go towards your homeownership goals such as a down payment, even with lower credit.

Wider home selection than rentals

Divvy lets you choose almost any home for sale on the market, as long as it meets our qualifications and your approved budget. You’re not just limited to only rental inventory currently available.  

Price transparency and flexibility

Divvy’s has no surprise rent increases and you’ll always know your home purchase price throughout the program. If you choose not to purchase the home, you can walk away with your savings, minus a relisting fee of 2% of the initial purchase price.

If you have lower credit but dream of owning a home, Divvy’s rent-to-own program can be your opportunity to make it happen while you work on improving your credit along the way.

Interested in learning more about Divvy Homes? Find out how it works.

Sources:

1 https://www.capitalone.com/learn-grow/money-management/credit-score-needed-to-buy-a-house/

2 https://realestate.usnews.com/real-estate/articles/rent-to-own-101

3 https://propertyclub.nyc/article/rent-to-own-homes-with-bad-credit

4 https://www.bankrate.com/real-estate/how-rent-to-own-works/#how-it-works

5 https://www.experian.com/blogs/ask-experian/what-are-the-pros-and-cons-for-rent-to-own/#:~:text=expert%20or%20attorney.-,How%20Do%20Rent%2Dto%2DOwns%20Affect%20Your%20Credit%3F,no%20impact%20on%20your%20credit.

6 https://www.creditkarma.com/advice/i/quick-tips-build-credit

7 https://money.usnews.com/credit-cards/articles/how-to-improve-your-credit-score

8 https://www.fico.com/en/products/fico-score