Developers Help Home Buyers Fix Their Credit

With a 550 credit score, Brown had been pre-approved for financing in May. By August, as the subprime crisis gripped the mortgage market, his lender had tightened its requirements enough that his application was rejected. The same thing happened to a whopping 141 buyers also looking to buy condos at the "Gates on Manhattan" complex. In fact, of the complex's 144 two- and three-bedroom units on the market, only one closed.

So the project's developer, LeTriomphe Property Group, came up with a new plan: As of March 1, it started offering all previously-qualified home buyers a lease-to-purchase agreement that allows them to rent a condo for up to 18 months, with the option to purchase it as soon as they qualify for a mortgage.

To that end, all tenants who sign up must enroll in a credit-improvement program with the Neighborhood Assistance Corporation of America (NACA), a nonprofit consumer advocacy organization. Through one-on-one sessions with a counselor, tenants will work toward qualifying for a 30-year-fixed, no-down-payment mortgage offered by NACA and Bank of America. According to Shelley Sanders, office director for NACA New Orleans, the program has no credit-score requirements, but does require members to pay off collections accounts and show proof that they can afford the mortgage payments.

Brown, who thought the offer sounded too good to be true at first, moved into his new place last week and has his first meeting with the credit counselor later this month. "You can rebuild your credit as you live in your house," he says. "It's almost like they're giving it to you if you're able to maintain it."

Stuck with an ever-expanding inventory of unsold homes, property developers are discovering that finding a buyer is no longer enough. Now, they must find a buyer who can also pass lenders' ever-stricter financing requirements. In many cases, developers are so desperate that they're actually giving prospective buyers a helping hand, referring them to a credit-counseling agency or even offering lease-to-purchase agreements that allow individuals to rent a home until they qualify to buy it.

Stephen Ross, president of Montage Development, a Los Angeles-based home builder, says his company's four- and five-bedroom single-family homes in the San Fernando Valley have been attracting roughly 40 to 50 potential buyers on a typical weekend, but few, if any, qualify for a mortgage.

Not only have lenders increased down-payment requirements to 10%, but they now ask that buyers have three months' worth of mortgage and interest payments in an escrow account and have a credit score of at least 700 or 720. "That's precluding at least 75% of our buyers from buying," Ross says. "So one of the things we do as a development company is work on increasing their credit scores."

Ross regularly gives potential buyers advice on how to improve their credit. He tells them, for example, that paying off their credit-card bills the day before they receive their statement instead of waiting until the due date could almost effortlessly increase their score since lenders would then report $0 balances to the credit bureaus. (This would decrease one's credit utilization, which is one of the factors determining a credit score. Click here for more credit-score-boosting tips.)