How to Rent-to-Own a Home With Bad Credit

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By Steve Nicastro Updated May 30, 2024

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Navigating the path to homeownership can be challenging, especially with bad credit (defined as a FICO score of 580 or lower.)[1] 

Fortunately, a lower credit score doesn't have to derail your dreams of owning a home. Rent-to-own homes, also known as lease-to-own or lease-option, offer a potential solution by allowing you to live in a home while improving your credit score in preparation for a future purchase.

Some companies provide rent-to-own opportunities for individuals with credit scores lower than 580. These options present a valuable opportunity to move toward homeownership while actively working to improve your financial standing.

However, rent-to-own isn't the only route to homeownership. Traditional renting while saving and boosting your credit might better suit you, preparing you for conventional mortgages that usually demand higher credit scores. For instance, conventional mortgages often require a minimum credit score of 620, while an FHA loan needs at least 580.[2]

🔍 First step: Evaluate your credit

Before exploring rent-to-own opportunities, it's crucial to understand your financial position:

  • Check your credit score. Knowing your credit score is vital as most rent-to-own companies and landlords set minimum credit score requirements. You're entitled to a free credit report every 12 months from AnnualCreditReport.com.
  • Review your credit reports. Regularly reviewing your credit reports can help you spot errors and understand the factors affecting your credit. This ensures you're fully prepared to discuss any issues with potential landlords or lending institutions.

These steps will equip you with the necessary information to navigate the rent-to-own process more effectively and confidently.

How to qualify for rent-to-own with bad credit

While traditional home purchases often require high credit scores, rent-to-own programs can be more accommodating with credit requirements. However, credit score is just part of the approval process, and other factors are also considered.

For example, many rent-to-own agreements stipulate a minimum monthly income between $2,500 and $5,000 and a solid employment history of at least three months. Eligibility might be restricted if you have a history of delinquent rent, evictions, foreclosures, or bankruptcy filings.

"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
Divvy Homes 550 1–2%
Dream America 500 $5,000
Trio 580 None
Home Partners of America 580 None
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Dream America has one of the lowest credit score thresholds for rent-to-own homes with a minimum FICO of 500. It also allows a generous debt-to-income ratio of up to 50%. In comparison, most mortgage lenders typically ask for less than 36%. However, remember that you'll also need a household pre-tax income of $4,000 per month, and at least $8,000 in liquid savings to qualify.[3]

Divvy Homes offers rent-to-own programs with relatively lenient qualifications: a minimum FICO score of 550 and a monthly household income of at least $2,500. Additionally, an upfront payment of 1–2% of the home's value is required, contributing to savings for a future down payment.[4] 

Home Partners of America sets its minimum FICO score requirement between 580 and 620, varying by market and agreement type. However, it's important to note that according to a Moody's report, only approximately 25% of customers with a credit score of 620 or lower successfully transition from renting to owning.[5] A minimum annual household income of $40,000 is also required to qualify.

Alternatives for home buying with bad credit

Buy a house with an FHA or VA loan

If you're facing challenges with credit, consider these alternatives:

  1. FHA loans. These loans are accessible with a credit score as low as 500, with a 10% down payment. However, if your credit score is at least 580, you might qualify for a lower down payment of 3.5%, though requirements can vary by lender.
  2. VA loans. Offered through the Department of Veterans Affairs, VA loans don't stipulate a minimum credit score, but individual VA lenders may set their own criteria.

To find the best option, shop at different lenders to compare credit score qualifications and other eligibility requirements.

Contact a housing assistance program

Many states and municipalities provide programs tailored specifically for first-time homebuyers, offering financial support such as down payment assistance and low-interest loans.

The Department of Housing and Urban Development (HUD) also has a range of homeownership assistance programs, including the Good Neighbor Next Door program, which offers a 50% discount to law enforcement officers, teachers, and firefighters.

Additionally, many local or community-based organizations offer help to prospective homebuyers. Check your local government's website and search for housing assistance or grants to explore what's available in your area.

» FIND: Homeownership assistance programs by state (HUD)

Work on improving your credit

Review your credit report for errors and inaccuracies that may affect your score. 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. Common credit report errors to look for include incorrect names, addresses, or accounts that have been closed but listed as open or misreported as late or delinquent.[6]

"It’s important to review your credit report regularly and dispute any inaccuracies that may be present," says McConnell. 

🔧 Steps to improve your credit

  • 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 lender approval.
  • Increase your income. If possible, increase your income by working additional hours or obtaining part-time employment. A higher income can improve your debt-to-income ratio, making you more appealing to lenders.
  • Build savings accounts. Boosting your savings is another way to increase lenders' chances of approval. An emergency fund assures the lender that you can 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.

The bottom line

Boosting your credit score is crucial for securing lower interest rates and reducing overall costs. For those with less-than-ideal credit, rent-to-own homes offer a unique opportunity to live in a potential future home while saving for a down payment and improving your finances.

Before entering into a rent-to-own contract, thoroughly explore your options and seek advice from financial experts, like local real estate agents experienced in these arrangements. Their guidance will help you navigate the process effectively and avoid common pitfalls, ensuring a smoother path to homeownership.

Next Steps: Talk to an expert!

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