Here's some good news: less-than-perfect credit (a FICO score of 580 or lower) doesn't need to hold you back from your dream home.
A rent-to-own property, also known as lease-to-own or lease-option, allows renters to live in a home while working to improve their credit score for a future purchase at the end of the lease. Companies like Dream America offer rent-to-own options with a credit score as low as 500 and Verbhouse requires no down payment.
However, it's not your only choice for buying a home, and you may be better off renting and saving while you take steps to improve your credit and finances. For example, conventional mortgages require a minimum credit score of 620, while an FHA loan with a 3.5% down payment requires a minimum of 580.
Before diving into the world of rent-to-own homes, take the first step by checking your credit score and reviewing your credit reports. Most rent-to-own companies or landlords require a minimum credit score (Get your free credit report every 12 months from AnnualCreditReport.com).
How to qualify for rent-to-own with bad credit
Traditional home purchases may require a high credit score, but rent-to-own home programs may have more flexible credit requirements. Credit score is just one factor in the approval process, with other criteria to consider.
For example, a rent-to-own agreement may require a minimum income of $2,500 to $5,000 per month with at least three-month employment history. You may not be eligible for certain programs if you have delinquent rent, evictions, foreclosures, or bankruptcy filings in your past.
"These criteria include having a steady income stream and a history of responsible payment on debts," says John McConnell, a nationally recognized Credit Expert and Specialist in Personal Finance.
Rent-to-own programs for people with bad credit
Here's a breakdown of some popular rent-to-own programs and their credit score requirements.
|Home rental company||Minimum FICO||Down payment|
|Home Partners of America||580||None|
Dream America has one of the lowest credit score thresholds for rent-to-own homes. It also allows a generous debt-to-income ratio of up to 50%, while most mortgage lenders typically ask for less than 36%.
Despite its name, ZeroDown requires a down payment of 2–3%. That's on par with some government-backed loans, which may offer a better path to homeownership.
Divvy Homes has a low minimum income requirement of $2,500 per month. But we don't recommend using Divvy if you have other options available.
Home Partners of America's minimum FICO score ranges from 580 to 620, depending on the market and type of agreement. Be aware that in 2021, only 26.4% of its customers with a credit score of 620 or lower were successful in achieving homeownership.
Can I find rent-to-own homes near me with bad credit?
Yes, you can! Learn how to find rent-to-own properties.
Alternatives for home buying with bad credit
Buy a house with an FHA or VA loan
One option is to apply for an FHA loan, which allows for a minimum credit score of 500, but with a down payment of 10%. You can qualify for a lower 3.5% down payment if your credit score is at least 580, although some lenders might have stricter requirements.
Another option is a loan offered through the Department of Veterans Affairs. The VA loan program doesn't have a minimum credit score requirement, but VA lenders may.
To find the best option for you, shop around at different lenders to compare credit score qualifications and other eligibility requirements.
Contact a housing assistance program
Many states and municipalities offer programs specifically designed to help first-time home buyers with financial assistance, including down payment assistance, and low-interest loans.
The Department of Housing and Urban Development (HUD) also offers a variety of homeownership assistance programs and the Good Neighbor Next Door program, which offers a 50% discount to law enforcement officers, teachers, and firefighters.
Many areas also have local or community-based organizations that help home buyers. Visit your municipality website and search for housing assistance or grants to see what’s available.
Work on improving your credit
Start by reviewing your credit report for errors and inaccuracies that may hold your score down.
Request a free credit report from AnnualCreditReport.com, where you can get a copy of your report from the three credit bureaus (Experian, TransUnion, and Equifax).
Make sure your report is accurate and complete. Check for errors such as incorrect names, addresses, or accounts that have been closed but listed as open or misreported as late or delinquent.
"It’s important to review your credit report regularly and dispute any inaccuracies that may be present," says McConnell. He then suggests several steps to quickly improve your chances of being approved for a rent-to-own agreement or mortgage loan:
- Pay down existing debt. Reducing credit card debt and other consumer debt lowers your overall debt load and frees up more money for other expenditures.
- Make timely payments. Late payments can adversely affect your credit score and make it more difficult to secure approval from lenders.
- Increase income. See if you can take on additional work hours at your current job, or find part-time work. Increasing monthly income can help improve your debt-to-income ratio, which may give lenders greater confidence in approving applications with larger loan amounts.
- Build savings accounts. Boosting your savings is another way to increase lenders' chances of approval. An emergency fund assures the lender that you'll be able to cover costs if something comes up without needing further assistance.
Another strategy to consider is requesting a rapid rescore from your lender. This process can improve your credit score quickly, typically in a few days. Ask your lender if they offer this service.
Improving your credit score overall will help you secure lower interest rates and save you a ton of money in the long run. If you have poor credit, rent-to-own homes can let you live in the home you plan to buy while you work on building up down payment savings and finances.
Before entering into a rent-to-own contract, research your options and consult with financial experts, such as local realtors who specialize in these types of agreements. They can provide guidance and advice to help navigate the process and avoid potential pitfalls.
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