Using rent payments to rebuild your credit

Q: How can I set up a lease-to-own on a three-unit property and have it count on my credit report? –Bruce T.

A: I’m delighted that you asked this question, for several reasons. There are many, many folks out there who are trying to recover their finances and their credit in the wake of a foreclosure, job loss or other recession-era money trauma. And, though the market has indeed picked up for sellers, there are still many who are struggling to get their homes sold at or near the price they need. A lease-to-own arrangement, more formally known as a lease-option, can be a smart, win-win strategy for both these types of people.

If you have lost a home to foreclosure or short sale, or just have had a rough few years, financially speaking, you may be blocked from obtaining a bank- or credit union-issued mortgage loan for a set period of time, but a seller might still agree to a lease-option. The challenge is that most individual landlords don’t report payments to the credit bureaus. As a result, while you’re making lease payments, your derogatory marks on your credit might fade away, but they aren’t contributing to the sort of positive credit history that you desire.

Some things to consider as you take on this challenge:

1. Understand what specific credit challenge you are trying to solve before you try to formulate the solution. Are you trying to improve your actual FICO score to a certain level? Or are you simply trying to reposition yourself to qualify for a mortgage in a few years? The plain truth is that even if your landlord/seller does report your payments, it still may not increase your numeric credit score, because it is not a conventional credit line that falls within the bureaus’ scoring algorithms.

So, if you’re looking to boost your credit score, rent reporting might not do it. If you are looking to qualify for a mortgage, though, there might be another way to leverage your rent payments toward that end.

2. Know that mortgage lenders might look favorably on your positive rent history even if it’s not reported. Lenders require more than a minimum credit score as a sign of creditworthiness. They also require a minimum number of trade lines, which are simply credit accounts.

For example, a lender might require borrowers to have a FICO minimum of 640 and a minimum of three open trade lines in order to qualify for a given mortgage program. Some lenders and loan programs will allow you to present your lease-option agreement, your canceled rent checks and/or your checking account statements showing your on-time rent payments as a nontraditional trade line account.

If getting another mortgage is your primary objective for having your rent payments reported, talk with your mortgage broker now about the documentation you’ll need to collect for the duration of your lease.

3. If you still want your payments reported, get up to speed on the alternatives. Traditionally, the only rental history items that appeared on credit reports of the big three bureaus — Experian, TransUnion and Equifax — were extremely derogatory items like evictions and court judgments for delinquent rent. However, there are specialized rental reporting bureaus to which property management companies and large landlords, like apartment complexes, report even positive payment records.

Experian recently acquired one of the largest of these, Rent Bureau, and says that Rent Bureau reports are now being incorporated into Experian-reported credit scores. Of course, mortgage lenders typically rely upon the middle of your three bureau scores, so there’s a good chance that the Experian score will not be the one that matters.

But if you are simply trying to document your positive payment history in a formal way, you might consider offering to make your payments through a property manager that reports to Rent Bureau or a similar service, and offer to defray any costs the landlord/seller incurs to do that. Many local landlord associations offer resources that can help.