Landlord’s Guide for Renting to Tenants with Bad Credit!
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Unlike big management firms, individual landlords have the flexibility to adjust their terms as they would like to. In most cases, you probably treat every tenant as an individual and not the numbers you see on their credit report.
The credit report is obviously a great tool that tells you if a potential tenant is a bad or good credit risk. From the reports, an individual with a credit score of below 629 means that they don’t pay bills or even if they do so, they tend to be late. In addition, it could also mean that the person has debt, which means trouble collecting rent.
At first glance, depending on credit scores is a great decision. However, it is a good decision to waive the rule in a few cases.
A tenant with bad credit score simply means that he or she can’t rent from bigger property firms. However, what is bad credit?
In most cases, a score of between 300 and 629 is bad credit, 630 to 689 is average credit, 690 to 719 is good credit, and 720 on wards is excellent credit. As an individual landlord, you have the option to ignore credit rating, especially in extenuating circumstances.
Such flexibility offers you an upper hand over bigger rental management firms that list thousands of properties. If you have never considered this option, it may be time you do so. Below are a few tips that will help minimize rent when dealing with a tenant with bad credit.
Tip – 1: Ask for Pay Stubs
In case of a tenant with a low credit score, it helps to look at his or her income. If the potential client has been working at a job for more than a year or has a decent income, you should probably consider this individual. Remember that most people spend about 30 to 35 percent of their income.
Asking for last year’s pay stubs offers you a means of verifying that the individual is actually drawing an income. In addition, call their employer and find out how long they’ve been working, position held, and likelihood of ongoing employment. Thus, renting with bad credit but high income is a favorable deal for landlord. When things check out, you still have a few more things you should do.
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Tip – 2: Request for Proof of Funds
Checking a potential tenant’s bank statements helps you determine if they have reserve cash to cover the rent. Looking at only the income does not give you a clear picture of who you are dealing with. However, knowing that the tenant has some reserve cash can help you determine if they are capable of paying the rent.
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Tip – 3: Request for a Co-Signer
Request the potential tenant to co-sign with an individual with good credit so you have one more avenue for collecting rent in case of non-payment. You can run the co-signer through a credit check just as you would your tenants. In addition, request for bank and income statements from the co-signer, and have him or her sign the lease too.
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Tip – 4: Ask for Reasons for the Low Score
A potential tenant may inform you that they have a bad credit score even before you have had the chance to run the credit check. Perhaps, you even missed out on carrying this important task yourself. No matter the situation, don’t dismiss the individual, just find out if there’s a reason behind the low score.
Sometimes the tenant may have a foreclosure or short sale on record, both of which tend to lower credit scores. Perhaps even your potential tenant was a victim of identity theft, or the report could have unreported errors. Overall, there are several reasons why a potentially good client may have a bad credit rating.
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Tip – 5: Request Past Rent Receipts
If the client is currently renting, ask him or her to present you with proof of the rent payments they have been making. Doing this will help you deduce if they can pay the monthly rent and if they pay on time every time. If possible, contact the current landlord and find out if they are a good tenant.
During the call, find out if the tenant paid on time, left the property in good condition, and possible reasons for moving. In case of eviction, you are better off not considering him or her as a potential client, and instead keep on looking else where. If the tenant cannot provide evidence and has a bad score, it makes them a risk.
Tip – 6: Ask for More
Bad credit individuals are expected to pay a higher interest when requesting for a loan. The reason behind this rationale is that such an individual is more likely to default on payments. Therefore, if you normally ask for a month’s worth rent as security charge a tenant with bad credit rent for two months and security – or just charges more monthly rent or higher security deposit.
Doing it this way is the same as what other lenders would do in your situation. In addition, if the tenant is turned down repeatedly when looking for a rental unit, they will be grateful that they have a place. However, make sure that you stay within rent ceilings that may be active in your area.
Tip – 7: Shorten Lease Term
Another strategy to dealing with bad credit tenants is reducing the lease term length. For example, if the usual lease length is one year, you can adjust the period to monthly, 6 months or 3 months. This allows closing tenancy period early in case of rent defaulting.
Tip – 8: Request for Direct Debit Payments
It is advisable to choose applicants with reliable income sources and bank accounts. This helps you ask for direct debit and even postdated checks that ensure rent is paid on time and in full as they do at certain properties like dallas-apartments.
Tip – 9: Discuss Rental Application Issues
In many cases, one of the best ways to predict future behavior is by looking into an individual’s past behavior. Unfortunately, responsible individuals can find themselves in financial trouble following mistakes they made in the past. In fact, according to Credit Karma and research firm Qualtrics survey, almost 70 percent American acknowledge that they’ve made major financial blunders before they got to 30 years old.
Credit Karma and research firm Qualtrics surveyed 1,051 American adults ages 31 to 44 from late November 2014 to early 2015
So, discuss with the potential tenant and find out what makes him or her risky. Maybe the credit score is low or they might be having a huge credit card balance due. Such a discussion helps you determine whether they are a good potential tenant in the event you approve the rental application
Some landlords strictly follow the guidelines already set out for accepting rental applications, but others tend to be flexible. Using the strategies above, it is time you consider renting to tenants with low credit rates.