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Building Your Credit While in a Rent-to-Own Arrangement

Couple outside rented house

A rent-to-own arrangement is a good Plan B when you can’t qualify for a home loan in the Beehive State. If your prospective mortgage lender in Utah does not think you are creditworthy enough, this option allows you to stake your claim for the house you want while buying more time to improve your credentials.

This form of seller financing does not automatically increase your FICO scores on its own. However, it can indirectly influence your credit — sometimes for the better, sometimes for the worse. Below are the things you should do to ensure that you will belong to a higher credit score range at the end of your rent-to-own agreement.

Make Sure the Credit Bureaus Are Informed

Lacking no rental record is among the common reasons mortgage applications are denied. Even if you have been a tenant for a long time, creditors will only care about your recent history. In other words, mortgage lenders may ignore your previous rental histories and just pay attention to that of your rent-to-own arrangement.

Much like ordinary landlords, not all property sellers are willing to report to the credit bureaus. They do not have to, and they gain nothing from making the extra effort to submit payment histories to third parties. As a tenant, knowing whether or not your seller is keen to tell TransUnion, Experian, and/or Equifax about your payments. Otherwise, your punctuality will not reflect on your credit reports.

If the seller does not want to submit rental data to credit bureaus, it will not be the end of the world. You can subscribe to a certain rent payment service, like PayYourRent, RentTrack, or ClearNow, to make sure your performance as a tenant will count. Such a service allows you to build your credit without taking out any debt. Although credit scoring models take into account many aspects of your finances, you could increase your FICO scores steadily using your rent payment history.

Observe Punctual Payment

Obviously, you should do everything to stay current on your rent. Consider it a dry run of your monthly mortgage payment, so do not be late. Yes, it is easier said than done. Your rent in a seller financing arrangement may be above the market since it may include interest and partial down payments. It is the cross you have to bear if you really want to reserve the property you want to buy.

Do Not Break the Lease

Keys with house keychain

Not finishing the agreement may appear only on a tenant screening report, but it can make its way on your credit reports. If the seller takes you to court, the credit bureaus may learn about the judgment and include it into your reports. If you break the lease while being behind with your rent, your debt may be sold to a collection company. At some point, the new owner of your liability may open a collection account, which will severely hurt your credit for a long time.

If you must break the lease, do it amicably and tie up loose financial ends. This way, you will not be subject to any potential harassment from a collection agency, and you can minimize derogatory marks on your credit reports.

Entering into a rent-to-own arrangement is a gamble because it can cost you more money in the long run without any guarantee that you can eventually buy the house you like. If you are not prepared for such risk, stay renting the traditional way and build your credit until your qualifications are good enough.

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