Rent-to-own home programs are becoming an increasingly popular path to homeownership for people with low credit scores or no credit history who otherwise might not be able to qualify for a mortgage. While most rent-to-own programs require a minimum credit score to qualify, it’s possible to find local listings that don’t require a credit check at all. This can be a helpful alternative to the traditional home-buying process, but it’s not going to be the right choice for everyone. Here’s what to expect with a no-credit-check rent-to-own program and how to avoid potential pitfalls.
How rent-to-own works
The rent-to-own process starts with finding an eligible property — one with a rental agreement that includes a clause offering the option (or sometimes, an obligation) to purchase the home after a certain amount of time. This rental agreement also specifies details such as:
- Length of the rental term before the home can be purchased
- The remaining amount to be paid when the rental term ends
- Whether any amount of the rental payments will go toward the final purchase price
- If the renter is obligated to pay for repairs or maintain the home while renting
The type of rent-to-own agreement will determine what happens once the rental period is up. Lease-option contracts do not obligate the renter to buy the home, and they may walk away from the property. Then there are lease-purchase contracts, which do require the purchase of the home — regardless of whether the renter can afford to buy it once the rental period ends.
Rent-to-own properties also come with what’s most commonly known as an ‘option fee’. This is a (usually nonrefundable), upfront fee that’s typically 1-5% of the home’s purchase price that is paid by the renter/buyer to the seller.
Securing a rent-to-own home without a credit check
Typically, rent-to-own companies that don’t check credit will instead require proof of income, a down payment, a background check, and information on your previous rental history. If you’ve missed rental payments in the past or have a criminal history, you can safely assume your ability to get approved for a no-credit-check home will be impacted.
Another way to find a no-credit-check rent-to-own property is by working with a private landlord. Look for individual property owners who are renting out their homes directly. They might be more flexible with their requirements and open to negotiating a rent-to-own agreement without a credit check, especially if you can provide a security deposit and demonstrate a history of on-time rental payments.
Your credit score is still important
Despite there being ways to get a rent-to-own home without a credit check, your credit history still matters. You’ll need to secure financing for the home should you decide to buy the house and your credit can determine if you qualify for a mortgage after the rental term. It can also affect the terms of the rent-to-own agreement, such as the purchase price and monthly rental payments.
Recall that depending on the type of rent-to-own contract, a renter may be obligated to buy the home even if they can’t afford it. For someone with a lease-purchase contract, having good credit at the time of purchase is imperative.
If you have a low credit score or no credit history, prioritize improving your credit score during the rental period and having it at a good place before the rent-to-own agreement ends. It can give you a better chance of securing favorable terms and conditions and, ultimately, successfully completing the journey to homeownership.
Is rent-to-own a good option for you?
Pros of rent-to-own homes
● Alternative path to homeownership for those who can’t qualify for a mortgage through traditional means
● Purchasing a home requires less money upfront and may be more flexible
● Gives more time to build savings and repair credit
Cons of rent-to-own homes
● Monthly payments are usually higher compared to traditional rentals
● May require upfront fees
● Risk losing money if you don’t end up buying the home
● Agreements can be complex with unfamiliar terms and conditions
How to find a reputable rent-to-own program
Should you decide to pursue this option, it’s important to find a reputable rent-to-own program with no credit check to avoid falling victim to rent-to-own scams. Here are five ways you can verify that your rent-to-own home offer is legit:
- Work with an experienced realtor. They can help you find reputable programs and connect you with local listings. A realtor can also do a market analysis so you get a fair price for the home, negotiate better terms, keep you informed of common pitfalls, and answer any questions you might have.
- Research the company or landlord’s reputation through online reviews and testimonials. Look for common themes and note any negative experiences people may have had. You can also ask the company or landlord directly about their acceptance of borrowers with bad or no credit.
- Check the Better Business Bureau (BBB) for any complaints or lawsuits against the company or landlord. Keep in mind that a good BBB rating doesn’t guarantee a successful rent-to-own agreement but can help you steer clear of potential scams and unethical businesses.
- Read the terms and conditions carefully. Before signing any agreement, review and understand the terms and conditions. Make sure you understand any fees or charges associated with the rent-to-own program and consider having your realtor or an accountant review the document as well.
- Beware of upfront fees. Not all listings are legitimate, so you must watch out for scams that demand upfront fees or deposits before signing an agreement.