February 05, 2019
Reduce the Risk of Renting to Tenants with Low Credit Scores
In a landlord’s dream world, every tenant would have a good-to-great credit score, and never miss a rent payment. Unfortunately, it’s not that cut-and-dry.
Many major credit bureaus, like TransUnion, Experion and Equifax use a FICO score that ranges between 300 and 850 to determine creditworthiness. Depending on the source, a “bad credit rating” is anything under 629.
Americans are, in general, scoring well, with FICO reporting that the average score is now 704, up from 686 during the housing crisis. However, FICO has also noted that credit card balances and delinquencies are also on the rise.
And, while the average FICO score tends to improve with age, there are people in their 20s and 30s that struggle financially, which can impact their score. Then, factor in all the reports that say that a vast majority of Americans live paycheck to paycheck. A sudden change in job status can deal a blow to a person’s credit score.
It’s inevitable that at some point in your career as a property professional, you will find someone who seems like a good fit, but has a less-than-perfect credit score. How can you reduce your risk? Let’s dig in…
Require a Cosigner
It’s not always an ideal situation, but it ensures financial responsibility and mitigate risk. And, accepting cosigners can help you fill vacancies when the market is tight. The cosigner agrees to receive notification of missed or late rent payment, and is responsible for paying it on the behalf of the tenant. Just note that while cosigners help with financial risk, they do not prevent behavioral risk, like noise complaints or utility shut-off.
Increase the Deposit
Some states have laws pertaining to how much you can demand as a security deposit. In the case of a potential tenant that has less than favorable credit, you may want to ensure you ask for the maximum amount.
Ask to See Pay Stubs
Hard times happen. And, many good people have a shaky credit history. The main thing to look for is verify income and look for patterns of behavior. Showing a regular, consistent work history and a solid track record of on-time bill payments can help assuage worries.
A letter from an employer shows that the prospective renter is making an effort to become your tenant. Always call and confirm the legitimacy of the letter from the employer. Don’t forget to call previous landlords. Talking to your prospect’s references will give you a better idea about the type of person they are and their ability to pay rent.
Make Automated Payment Mandatory
Don’t accept cash or checks. By ensuring the rent comes out on time every month, you are also ensuring that the rent money isn’t spend on other things.
While you can’t skip over checking references or asking to see pay stubs, talking to the person about they score and the factors that contributed to a poor score can really help you understand their situation. When you ask for an explanation, you can find out what happened and why. Sometimes, there is even a glitch, and the prospect had no idea their credit score was so poor. It might be something they can work out with the credit bureau, and improve their credit.
The Last Word
Renting to people with lower credit scores is inevitable, especially in today’s age. But by being consistent in your approach, and getting additional information and putting safeguards in place, you can reduce your risk. Using technology, like Property Vista’s tools for automated payments, also helps to ensure that your revenues are secure. See our online rent payment system and check out our pricing.