Which prospective buyer is better?

[Shera Gregory]

I have a single family rental home that I plan to sell next summer. We are in the process of screening tenants for a one year lease. This is not a lease option but we have made it clear that we would very much like to be able to sell the home to the tenant. We have a couple of people who are very interested. We used SmartMove to get credit info.

Unless the best option is "none of the above" I plan to decide between two applicants. Which of these seems to have the best shot at getting a loan twelve months from now?

Tenant A has a credit score of 646 and is self-employed. His projected debt to income ratio is about 48% but can work that down below 45%. His income is about 29% of the planned sale amount. I have asked to see his tax return for 2012 because I'm not sure how well he can document his income. He has a painting company (!) with about seven employees but he doesn't seem to have a good grasp of accounting requirements for keeping track of all expenses, income etc to be able to do a P&L mid-year if the bank wants that. I don't mind working with him to help him get up to speed on at least using Quicken for this.

Tenant B has a W2 job that is higher than Tenant A. His projected debt to income ratio is about 31%. His income is about 44% of the planned sale amount. However, his credit score is 579. I asked about this and he said that he had applied for a home loan with two different agencies which resulted in multiple inquires that have reduced his credit score. He has 17 late payment incidents but none of those are in 2012 or 2013. So -- will he really be able to bring his credit score up into the 650 range by next summer? He has access to a VA loan.

My gut says to go with Tenant B and to sit down with Tenant A and give him some suggestions on what he needs to do over the next year or two to firm up his income reporting.

What else should I be considering? Do you agree or no?

[Account Closed]

Funny, I just had the same conversation yesterday with a family member about deciding between two applicants for his rental unit. I'll tell you what I told him. Find out what their present and past landlords say. Making a housing payment a priority and being easy-going and trouble free as tenants matters just as much as credit and income. Since you are not entering into a lease option, your number one priority, IMO, should be finding best possible tenants, not the best possible tenant buyers. I would not focus on your applicants' ability to buy your property a year from now. There are too many variables that make it so that they might not even be interested a year from now. For one, they haven't lived in the house yet. For another, a year from now, appreciation may be in your favor and your tenants might not be able to afford the property for what you can sell for. Or, if interest rates continue to go up, they might not be able to afford the payment.

Just my opinions, of course, but I'd pick the best tenant based on tenant history and stable income.