Does rent-to-own help build credit?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

You’ve probably heard of leasing a car. Well, rent-to-own is a similar model but for homes. You sign a contract at the beginning of your rental agreement that allows you to purchase the rented house at the end of the contract. Typically, you pay a premium monthly rent (and a nonrefundable, one-time option fee) for this opportunity. And, just like a lease on a car will count your lease payments toward the car’s purchase price, a rent-to-home contract may count a portion of your rental payments toward your final home purchase.

Many individuals who consider rent-to-own have poor credit that they’re working on (we’ll explain this later on), so they may also be wondering, “Does rent-to-own build your credit?” The answer is both yes and no. 

How does rent-to-own work?

The rent-to-own (RTO) process is relatively straightforward. You can sign two types of rent-to-own contracts: a lease-option or a lease-purchase agreement. As the name implies, a lease-option agreement means that at the end of the contract you can choose to buy the house or walk away. In comparison, a lease-purchase locks you into the purchasing decision, so you have to buy the home at the end of the contract.

Consider these pros and cons of RTO.

Pros of rent-to-own

The individuals who opt for rent-to-own usually know they want to buy a home soon but need a little more time to improve their credit or save a bit more. As a result, rent-to-own is the perfect opportunity to start working toward that goal of homeownership. RTO contracts take a portion of your rent payments and apply them to your future purchase price, so it’s like you’re building equity while you’re renting. The exact percentage of your rent that will be set aside will be negotiated and finalized in the contract. 

Another benefit is that rent-to-own allows the person to test out homeownership, the house and the area without being fully committed (assuming the contract is lease-option). So, if something is wrong with the house at the end of the contract or you want to move, you can simply not buy the home. 

Lastly, rent-to-own contracts often lock in a purchase price at the time of signing the contract. If the housing market increases while you’re renting, you’ve secured yourself a price and will ultimately buy below market value.

Cons of rent-to-own

Rent-to-own isn’t for everyone, and it does come with some downsides. Most notably, you pay a premium for the option to purchase the home at the end of the contract. This premium comes in the form of higher-than-average rent prices (10 – 15 percent higher) and the one-time option fee (often between 1 and 5 percent of the home’s final price). If you don’t end up purchasing the house, you’ve spent additional money for no benefit. 

Additionally, if you want to buy the home at the end of the contract but can’t get approved for financing, you relinquish the rights to purchase the house and all the money you put into it. And if you’ve signed a lease-purchase plan and can no longer buy the home, there may be legal and financial consequences. 

Also, there is a risk that the market could decline after you lock in a home’s purchase price in the contract. If that happens, you’re only left with two options: buy the house at too high a price or walk away and lose all the money you put into the RTO. 

Lastly, rent-to-own payments don’t typically build your credit in the way that mortgage payments do—but you might be able to negotiate something with your landlord.

For more information on rent-to-own, examples of contracts, red flags to look out for and ways to shop for the best deal, download the Complete Rent-to-Own Guide for Prospective Homebuyers.

Rent-to-own and your credit

Every adult consumer receives a credit score based on their credit report. Your credit report is a collection of your balances, transactions and transgressions with lenders. Based on this data, a credit score is generated that’s meant to tell lenders how trustworthy you are with credit. 

A high credit score can open many doors, including lower interest rates, more credit-lending opportunities (credit cards, lines of credit, personal loans) and increase your chances of loan approvals (on mortgages, auto loans, etc.). As a result, many people focus on improving their credit and maintaining a good score. 

If you’re considering rent-to-own, you understand that you’ll need to secure financing (a mortgage) at the end of the contract to purchase the property. And you might be wondering whether rent-to-own can help your credit. After all, if you can save, build up equity and improve your credit during your RTO agreement, you’ll be in a great position to buy at the end of the contract.   

Unfortunately, that’s not how it typically works. Although mortgage payments are reported to the credit bureaus, rent-to-own agreements generally are not, which means they won’t affect your credit. The same is true for most rent payments. 

However, the good news is that there’s a potential workaround. If you want, you can talk to your landlord about rent reporting. 

What is rent reporting?

You can’t report your rent payments yourself, but your landlord can rent report to all three major credit bureaus (TransUnion®, Experian® and Equifax®). Rent reporting adds more data to your credit report, which can impact your score significantly. However, rent reporting is only a good choice if you make your payments on time and in full. If you’re responsible with your rental payments, your credit will be positively affected. However, it’s important to understand that if you miss any payments, your score will be hurt. 

Ask your landlord about rent reporting. You can even potentially add a clause in the RTO contract that requires the owner to report your payments. 

Take advantage of the extra time to build credit

Rent-to-own agreements are specifically good if you need time to work on your credit. You can use the rental period to improve your credit, so when it comes time to switch to a mortgage to buy the house, you can get a better mortgage with more favorable terms. 

You can work hard to build your credit during this time by paying down your debts, paying all your bills on time and evaluating your credit report for errors. According to a Consumer Reports survey, approximately 34 percent of Americans have a mistake on their credit report. These mistakes can be dragging your credit score down and jeopardizing your future mortgage approval. 

You can also use the additional time to build your savings or down payment amount. 

Setting yourself up for success with rent-to-own

Overall, if you believe rent-to-own is the right option for you, make sure you position yourself to end the contract in a solid financial position. Save money and improve your credit so your chances of getting approved for a mortgage with great terms are higher. Let’s say your hard work gets you approved for a mortgage at a 0.5 percent lower interest rate. The difference is shocking when you compare a 3 percent versus 2.5 percent interest rate on a $250,000 mortgage over 30 years. That slight reduction in interest will save you over $23,000. This is precisely why good credit matters. 

Ensure your credit report is accurate so you don’t have incorrect negative items impacting your score. The credit repair consultants at Lexington Law Firm can get you started with a thorough review of your credit reports from each credit bureau. If any errors are found, we can file disputes on your behalf so you can be fully prepared for when your RTO contract ends. 

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Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Lexington Law is not an RTO company. Any content provided on this website regarding the topic of RTO is nothing more than a resource Lexington Law believes might be helpful to readers of its website. Lexington did not write this content. It was provided by a third party. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers. Lexington did not write this content. It was provided by a third party.