Are you a renter dreaming of buying your first home? If you’ve started looking into what it requires to close on the deal, you probably already know that one little number plays a huge role in buying a house – your credit score. You may think that your rental history, and all those on-time payments, would help build your credit score. Unfortunately, that’s usually not the case. However, there is a new tool on the market that helps you build credit quickly while preparing you for homeownership.
So how can renters get credit for all of their on-time payments? Say hello to rent reporting! In the following infographic, we outline the benefits of rent reporting and how it can help you on your path to building credit and achieving homeownership. A special thanks to our friends at Esusu – the latest and greatest in rent reporting technology.
Are you a renter dreaming of buying your first home? If you’ve started looking into what it requires to close on the deal, you probably already know that one little number plays a huge role in buying a house – your credit score.
Why is a credit score so important to mortgage lenders?
Mortgage lenders use your credit score to determine your ability to pay off debts. Most home loans are hundreds of thousands of dollars, and lenders want to know that you’ve successfully made on-time payments in the past.
If you had a friend that was constantly borrowing money and had a reputation of never paying anyone back, chances are you’d be hesitant to loan him any money again, much less hundreds of thousands. Your credit score is a fast, reliable way for lenders to check on your reputation, as it relates to paying back debt.
You most likely have an established credit score if you’ve ever borrowed money over time. The exact number determines your eligibility and your interest rate when it comes to a mortgage. Most lenders require a minimum score of 620 or above, and the higher your number, the better terms you’ll receive on your loan. Because a higher score indicates a successful history of making on-time payments in the past, a lower score means a bigger risk to your mortgage lender. They may still approve a loan if you meet the minimum requirements, but you’ll see a higher interest rate than someone with excellent credit, which means you’ll pay more in the long run.
Doesn’t my rental history count towards my credit score?
You may think that your rental history, and all those on-time payments, would help build your credit score. Unfortunately, that’s usually not the case. Rent is not technically a debt, which means you could pay rent consistently for five, ten or even twenty years and still not build the credit you need to buy your first home. This reality can make it difficult for renters to establish the score they need to get approved for a mortgage.
We think rent should count as a debt
Here’s why this doesn’t make sense. In a homeowner’s situation, there is a fixed fee (the monthly loan payment), a signed contract, and fees for missed payments. This also applies to a renter! It’s the same scenario in a lot of ways, but only one situation builds credit. Does that seem fair to you? It doesn’t to us! Your credit score is based on your ability to make on-time payments you’ve agreed to, and the contract you have with your landlord should count for something.
Renting is a common living situation nowadays. In fact, most homeowners rent before they buy. A home is a huge commitment that frequently takes years of savings and a readiness to stay put in one area. It’s not often that people are ready to buy their first home the moment they move out of their parents’ place or graduate from college. Which means renting is usually the best option.
Paying rent is a direct parallel to your ability to pay a mortgage. It’s usually a comparable amount to a home (or more), and it occurs on a monthly basis, just like payments to a lender. In a lot of ways, paying rent prepares you for the responsibility of homeownership. And it should be considered by lenders when reviewing a loan application. Research on how a rental payment history equates to a mortgage commitment shows that “Borrowers who had no missed payments in the 24-month period performed extraordinarily well over the next three years.”
One of the reasons rent payments don’t help you build credit is because landlords aren’t reporting your payments to the credit bureaus.
Introducing Rent Reporting
So how can renters get credit for all of their on-time payments? Say hello to rent reporting! Rent reporting is exactly what it sounds like. The service allows your rental payments to be reported to the credit bureaus. If you’re making those payments on-time every month, rent reporting is an extremely effective way to improve your credit score.
A win win for you and your landlord
Rent reporting can help you build the credit you need to buy your first home. And it actually has benefits for landlords too. Statistics show that seventy percent of renters who are aware of rent reporting by their landlord are more likely to make on-time payments.
Because many people recognize the value of rent reporting when it comes to building a credit score, it can also help landlords fill vacancies. Look at it this way. There are two apartments for rent in the area you want to live in. They’re both comparable, offering similar amenities and within a few bucks of each other. Do you choose the option without rent reporting, which means you’ll go another year without getting credit for making monthly payments? Or, do you sign up with the landlord that will update the credit bureaus on your behalf and help you get one step closer to homeownership? If you chose the second option, you are in the majority. Reporting shows that 2/3rds of renters would choose an apartment that offered rent reporting over one that didn’t.
Rent reporting also lowers evictions, which saves landlords $20,000 in costs on average. That’s a big number!
It’s About More Than Buying a Home
If you’re reading this article and saying to yourself, that all sounds great, but I’m not ready to buy my first home, do I really need to worry about choosing an apartment with rent reporting? The answer is yes!
Building credit is about more than just buying a home. An excellent credit score is a driving force behind your access to favorable credit cards, loans and ultimately building wealth. According to a report from Credit Builders Alliance, As many as 100 million Americans are excluded from the mainstream credit system today due to thin or poor credit histories.
Consider this simple example of how bad credit can cost you. Any loan, not just the big ones like buying a home, will cost you more if lenders consider you high-risk. From refinancing student loans to buying a car or just trying to get a credit card, high-interest rates await those with bad credit. And that’s if you can get a loan or credit card at all.
Many people with bad credit are denied access to any loans or credit cards, leaving them with high-risk options like payday loans that charge as much as 400% interest. In comparisons done between individuals with good credit and bad credit, estimates show that you could pay an extra $200,000 or more in interest over the course of your lifetime, all because of your credit history!
We believe you should have the opportunity to build your credit with every rent payment. It could be the difference between never having credit and building it quickly. And if you decide to buy a home, this extra boost to your score can certainly shorten the time it takes to get there.
How do I get started with rent reporting?
Rent reporting isn’t something you can do on your own, but now that you know what it is, you can get the process started. If you’re looking for a place to rent, ask potential landlords if they offer rent reporting through services like Esusu. If you’re already in a lease, ask your existing landlord if they utilize rent reporting and, if not, if they will going forward.
Once your landlord starts with a rent reporting service, you will begin to reap the benefits. People with established credit who have two years of rental history can increase their score by up to fifty points! And if you don’t have a credit score to begin with, you could jump to the mid-600s in just two years.
Keep in mind that rent reporting improves your credit if you make on-time payments. But it can affect you negatively if you run behind or miss payments when due, just like any other reporting service.
At Digs, we’re constantly working to provide resources that help you move one step closer to homeownership. By understanding the value of rent reporting and working with companies like Esusu, you have the opportunity to get credit for payments you’re already making. Whether or not you are ready to start the home-buying process, improving your credit will ensure you have greater access to the resources you need to build wealth over your lifetime.