Some investors put their lease option tenants onto credit repair programs in an effort to help ensure that the tenant is able to exercise the option. For most, the results lackluster at best. Why is that?
There can be several reasons but the main two are that credit repair programs generally address past derogatory items on the credit report without regard for the individual’s current use (or misuse) of credit and do not address all of the issues that need to be addressed to ensure that the tenant will be approved for a mortgage.
Many credit repair companies take a shotgun approach to derogatory entries on their clients’ credit reports. Their operating basis is, “if it’s negative we’re going to dispute it.” They don’t know and don’t want to know whether the derogatory item on the credit report is valid or misreported. They bank on a lack of response or a lack of adequate documentation from the creditor when the credit bureaus conduct their investigations of the disputed items. If the creditor simply fails to respond to the credit bureaus within 30 days, the credit bureau removes the item for the credit report. If the documentation that the creditor provides about the account in question is deemed to be inadequate the item is removed from the credit report. This is all fine until the creditor responds with valid documentation on the disputed account. As soon as that happens (a month or a few months later) the disputed item goes back on the credit report. There are other approaches to credit repair that are variations of the above. What they all have in common is that they remove negative items from the consumer’s credit history, which in many cases raises the credit score.
Here’s the problem. According to the Federal Fair Credit Reporting Act, only items which are erroneous can be disputed. Therefore the best you can hope for with an honest approach to credit repair is that the credit report is error free at the end of the program. This doesn’t give you a qualified home buyer.
A good credit score is made up of several factors and missed payments and similar negative history account for about 30% of the credit score. The rest of the score is calculated based on data about how they use credit and the types of credit they use. Credit repair programs don’t generally address these. This is why someone can go through a credit repair program and still have a credit score that’s too low for them to qualify for a home loan.
In addition to the credit score number, underwriters (both automated and human) look at several other things when they’re making their determination as to whether to approve a loan for a particular borrower. If the credit score is high enough to get the borrower in the door, the following additional data get reviewed:
- trade lines - how many open and active credit accounts does the borrower have with good credit histories
- collection accounts - any outstanding collections may need to be paid off
- judgments would need be satisfied
- tax liens not only have to be paid but the liens have to be released by the tax authority and the release recorded
- income and employment need to be adequate and must be documented along with a reasonable expectation the income will continue
- debt to income ratio - if it is too high existing debts may need to be paid off in order to qualify for a mortgage
- bankruptcies and foreclosures would have to have aged sufficiently according to the lenders guidelines
- loan to value must be within the lender’s guidelines
- borrower’s cash on hand must be adequate to cover closing costs and meet lender’s reserve requirements
Several of the items on the above list are beyond the scope of credit repair services. This is why credit repair programs don’t do much to improve performance of lease options. There will be some successes, but not enough.