Building Credit History

[OlegP]

Rent to Own tenants need to qualify for a
mortgage when the option term is up and they are ready to buy the
property from you. Some of them have little or bad credit history.


So how do you prepare your tenant`s credit?


In the past, it was easier. Prior to the credit crunch of 2008, I helped
my own Rent to Own tenants build their credit history by applying for
so-called Department Store private label cards.


Many department
stores offered their private label cards, and even offered you some
discounts off your first purchase as an incentive to sign up. So even if
you did not have any credit history yet, they often were willing to
take the risk and approve you for your first credit card. The Bay,
Zellers, Peoples, Mappins, the Children`s Place, and the Home Depot were
all willing to get you started on your path to building credit.


All
you had to do once you were in possession of your shiny new credit card
was use it on a regular basis for a few months for nominal amounts and
make your payments on time, in full. Six months later you could go to
your bank branch and apply for their VISA or MasterCard. By then you
would have established sufficient credit history and solid enough credit
score to qualify for their card. Onward and upward!


Follow the same strategy for with your new bank card, and 6-12 months later your credit is ready for a mortgage application.


My tenants did it, and ended up buying their first ever home!!!


Does this strategy still work?


In some cases, yes.
But after most financial institutions tightened their lending criteria
in 2008, applicants with no or little credit histories were among the
first ones to be targeted by risk managers.


I investigated what is available these days for those
interested in starting to build their credit history, and came across an
interesting product by Capital One.


A guaranteed secured MasterCard. Looks like a good start.


With
a security deposit as low as $75, annual fee of $59, and annual
interest rate of 19.8%, you can start establishing your credit! Use it
to buy whatever you buy anyway, BUT REMEMBER pay it in full every month
and on time. In 6-12 months you will be ready to apply for many other
credit products, and really establish yourself strongly. This card will work well for young people or newcomers to Canada. Capital One has a similar product for those who need credit improvement.



Has anybody seen anything else that might work?



Thanks.



Oleg

[email protected]

www.realestateriskmanager.ca

 

[wanderer]

Hi Oleg,



Great insights on this post. I think its an awesome way to have a durable relationship with your tenants as well.



Thank you. I was wondering if prepaid credit cards could help. Maybe worthwhile to talk to a mortgage broker about this. Having a good mortgage broker that your RTO tenants can go to would create a valuable partnership that could then lead to you getting guidance and advice on how to ready them to make that move after the 2 year period.





Onward and Upward,



Best,



Wanderer.

 

[DaveL]

If you live in BC Vancity offers secured Visa cards and you can choose a no annual fee card. Citizensbank Visa used to offer a secured Visa with no annual fee but I am not sure if they still offer this. This was open across Canada. Also Citizensbank and Vancity report to the credit bureau on secondary cardholders which may provide options for those that have someone willing to be a primary. Prepaid cards will not help your credit rating.

 

[mortgageman]

Typically lenders want to see two trade lines with a two-year history. (a car loan, a credit card, a line of credit are all trade lines)

If you have low credit limits or have only had the card for a few months you will get what's called a false credit score. This means your score may be high but the lenders will discount it because there isn't an established track record.

It's possible to show alternative credit with some lenders. This can include a landlord letter showing on-time payment of the rent in addition to a letter from a utility company or phone company showing one year's good payment history.

There is one non-bank mortgage lender that I use that will give give people secured visas.

If you have people who would like one please let me know and I'll help them out.

 

[cmattric]

Oleg,



CapitalOne is a good option. I saw 100 point improvement in credit score of somebody I helped before.



I don't how true but we used a different method. Instead of paying say $100 one time a month, we pay $10 ten times a month by setting up automatic payments. Not only it improved credit score, also helped him to get $5,000 gold card after one year. (The payment in total must be more than minimum payment)



Again, may be this is completely urban legend, however we've witnessed significant improvement.



Worth a try,



Mehmet

 

[OlegP]

Yes, indeed, Wanderer! A good mortgage broker is a key relationship to create when it comes to helping the future buyers of your property to establish a solid credit file. Some people use credit clinics, but unless your RTO tenants have a very complicated situation, a mortgage broker should be able to help just fine.



Thank you for your feedback.

Oleg

 

[OlegP]

Dave,



Good to know about Citizensbank reporting on secondary cardholders. That is a good way to help your spouse or teenage children of qualifying age to develop credit skills.



I do have good news for you! I spoke with Capital One, and they do report to the credit bureau on their prepaid cards. In fact, they start reporting 60 days after the card is activated.

 

[DaveL]

It must be a reloadable prepaid that you must get approved for and have higher service charges. When you say prepaid I think of what I can buy at a corner store or grocery market. There is no way this could report to the CB as you pay a couple bucks to have it loaded. However I know reloadables through FI's they will still pull a CB. Good to know.

 

[OlegP]

That's right, Jason. Two trades are very important. That's why I was told my RTO tenants to get a department store card, followed by a bank credit card 6 months later. Then when they reached 12 months of active credit history, they were able to qualify for mortgage. In the Fall of 2008 yet! And yes, the bank asked for my letter of reference confirming that they always paid rent on time.



Are you dealing with credit unions at all? Do they have any secured cards?

 

[OlegP]

Hi Mehmetm



Thank you for sharing your experience with Capital One. It is very helpful to know that they do what they say.



I heard of the multiple payments technique, which is supposed to increase your credit score. It is a very interesting topic, and I will try to address it on my blog and perhaps on this forum too at a later date. The only way it would work is if the Beacon scoring model had a variable called something along the lines of # of Payments in last 12 months (or 6 months or 24 months). This variable would have to be very predictive to generate that many points. Let's assume it is, and let's assume you only have one credit product. Here is how it would look in points calculation (points are just made up here, of course):



0 payments - 0 points

1-3 payments - 20 points

4-6 payments - 40 points

7-8 payments - 60 points

9-10 payments - 80 points

11-12 payments - 100 points



So max points you can generate by making payments on your sole credit card for 12 months is 100 points. To generate more than 100 points, the model would have to say 11+ payments, which would me a major loophole.



In other words, in theory it is possible that this loophole exists, but I doubt it. I believe that by making payments in full and on time for 12 consecutive months would produce the result without guesswork involved.



Thank you for your comments. I hope I did not confuse you with my example. Feel free to contact me at the e-mail above, if you would like to discuss further.



Oleg

 

[Sherilynn]

[quote user=mortgageman]Typically lenders want to see two trade lines with a two-year history. (a car loan, a credit card, a line of credit are all trade lines)...



It's possible to show alternative credit with some lenders. This can include a landlord letter showing on-time payment of the rent in addition to a letter from a utility company or phone company showing one year's good payment history.





Thanks for the info. I didn't know that many lenders like a 2-year history. I also didn't know that a landlord letter would be of any use. I have many prospective rent-to-own clients that ask if we report to the credit bureau, so now I'll have a good answer for them.