Is it just me or is pulling a Tenant's CREDIT Score Harder than Ever?

Question

I just started managing one of my rental units after a several year hiatus (it was managed via a property manager during the interim).

I'm screening applicants for a vacancy, and I noticed something odd. I pulled what I thought was a "Credit Report". I paid for a "Credit report" (yes, normally the tenant pays, but in this case I paid).

And the tenant had a score. In the low 600 range. This was below my criteria, but the software I was using recommended that I "Accept" the tenant.

This was confusing to me. So I read through the report. I notice a couple of late payments, an item in collections, and an eviction that was reported and took place in October 2022.

What!?

I had a similar application (this time with a 593 "Resident Score") for the same property a few days later, and they came back with a 593, also in the "Accept" range.

Turns out that what I was viewing was not a "Credit Score" but rather a "Resident Score". It seems that most property management services use this or a VantageScore (also not a FICO score) nowadays. It took me multiple tries to find a screening service that actually provides FICO scores.

Clearly, standards are different with a Resident Score than FICO, what I was used to back when I used to manage all my properties personally. Anyone else have a similar experience?

Is this a problem that has slowly oozed into our industry, or did I get a rare exceptional two cases? Should landlords use the "Resident Score" or "FICO" score to screen tenants?

Randall Alan · Answer

@Scott Trench

So I will start off by saying I have no idea what a "resident score" is... but certainly know what a FICO score is. But I'm going to to take a different approach and suggest you use neither as a whole. I think you have to stand back and ask yourself why your tenant is renting, and not buying a house? Half the time it is because their FICO score isn't great. So perhaps that makes them not a good candidate to be a BUYER of a house - but to me it is actually what (sort of) qualifies them to be a renter. Can you use a FICO score to screen your tenants? Sure! But at the end of they day they aren't buying your house, they are renting it.... where you have an opportunity once a year to not renew their lease, and to evict them if they don't pay. So my point would be that you should be looking at what is critical to being a good renter, and not so much a good 'buyer'.

Before we even get to any sort of report for a tenant, we are looking at what is going to make a good renter for our unit. At this point, we are even above looking at any tenant report... we are looking at the unit. Let's say the unit is a 2/1. We are looking for a family of absolutely no more than 4 people - presuming a couple and two children if they are younger, or same sex kids. If the kids are opposite sexed teenagers, a 2/1 really isn't a good fit for them in our opinion... but some (read: MANY) tenants will jump at a 2/1 even if they have 6 people in the family. So before we even get to screening the tenant for how they handle their finances, we are screening our applicants for "do they fit the property" for who they are as a family. We literally put right on our listing: "Maximum occupancy X people". In Florida the rule is 2 per bedroom plus one additional person (I guess sleeping on the couch).

We have a lot of our units that are on septic systems, instead of a city sewer. Septic systems are designed for a particular volume per month, and that volume is based on bedrooms. We recently were having septic issues at one of our duplex properties, and come to find out that our family of 5 in the unit, had their mother and father living with them, but then also moved in another evicted family of 5 more... somehow sharing a 2/1?? And to top this off, we're letting another family use the bathroom facilities to camp out back!!!! In total it was about 15 people on one side of our duplex. And we wonder why we were having issues!! We immediately gave the tenant notice that they had to only have 5 living in the unit, and ultimately we had to evict them for violating their lease terms which specifies the occupancy of the unit.

After we have a family that fits, we want to know three basic things:

1. Can they afford the rent? This is a mix of looking at their VERIFIABLE income, and much like a bank we are looking for 3 times the rent for gross income. We also look at how long they have been at their job as a part of that analysis.

2. What is their rental history? Recent evictions for us are disqualifying... but the older it is the more we are willing to look past it. If it makes us leery, we will raise the security deposit requirements and may say, "Due to your history we will need first and last month's rent." So an eviction 10 years ago would practically be ignored with an otherwise good record since, while an eviction 3 months ago is a no go. We will call the previous landlord and discuss the tenant's previous performance as well.

3. What is their criminal / misdemeanor background? You look this up at the county clerk's office online for their recent addresses without even having to run a credit check. We had one tenant that had a "service animal". Turns out when we looked the tenant up their "service animal" bit the adjacent property owner and received a ticket from code enforcement for not keeping their dog on their property. That's not a 'service animal' we want in one of our units.. and Florida law allows for landlords with a justifiable reason to turn away service animals for such reasons (verifiable threat). But mostly we are looking for criminal behavior. We don't care about speeding tickets (usually)... but drug and violence related issues that are newer would be a no go for us. One that was 15 years ago and a spotless record since - we will factor in that 'good behavior' and 'finally got their stuff together' and give the tenant a chance. In the end, it is a mix of these three things, plus our instincts as to how we rank applicants.

Point being though - a FICO score isn't a great indicator for the items above... so using only a FICO score, or using a FICO score at all isn't a great litmus test for the caliber of a tenant... as the reason most people rent is because they do have a less than stellar credit score. That's not to say that you won't find plenty of people with great fico scores renting... but restricting yourself to only great FICO score tenants I think misses the mark on the typical renter. It''s too narrow of a parameter to get an accurate feel for your renter.

All the best!

Randy

Drew Sygit · Answer

@Scott Trench man, this sounds like the Housing Crash all over again!

Lenders were giving loans solely based on FICO scores - and got burned because the score models were no where near robust enough.

Coming from the mortgage industry and witnessing the carnage caused by the blind trust in credit scores, we've NEVER trusted scores. It's no different then an investor using the "1% Rule" to identify a rental to buy. It's only a TOOL, not something to blindly trust.

We've seen applicants with 700+ FICO scores that only had student loans in deferrment on their credit reports. While that's not bad news, it's also NOT good news for approving them without more due diligence or a cosigner.

In our opinion, the credit industry is taking advantage of ignorant DIY landlords and new PMC's by selling them services that promise to speed up the approval process and make it easy - just like the mortgage industry did in the early 2000's. There are options out there that offer just a score profile with no tradeline info - but, it's CHEAP.

How many PMC's advertise approvals within 1-3 days? In our experience, that only applies to maybe 70% of Class A applicants, dropping with whatever credit model score you want to reference. With Class C applicants, we really only pull a background check to quickly get the eviction, criminal & residence histories. Utility collections and chargeoffs are also useful.

We've always pulled full national background checks with all tradelines to get a full understanding of an applicant's payment history. We also require an acceptable Verification Of Rent (VOR) unless an applicant has a 680+ score with at least 4 active tradelines, each with 24+ months of history.

@Randall Alan if you understand the challenges with blindly relying on credit scores, why are you using "income = 3x rent" still?

In our opinion, that's another qualifier no different than the 1% Rule, etc.

Ask yourself, will the average tenant prioritize their car payment or their rent payment?

The answer is, the majority will prioritize their car payment. The logical reason is that their car can be repossesed faster than they can usually be evicted.

We use the mortgage industry's "Debt-to-Income Ratio", which includes all debt payments (not expenses). Don't forget to check their paystub for garnishments and child support deductions and include those as monthly debts.

This is a much more robust approach than ""income = 3x rent" :)

We wrote a blog series here on BP about this called, “How to Screen Applicants like a Pro”:

https://www.biggerpockets.com/member-blogs/3094/93296-how-to-screen-applicants-like-a-pro-part-1-verifying-credit-reports

Scott, hope you don't ban me for this, but anyone who wants to speak more about this issue in detail is welcome to contact me - but, you'll have to email me as I can't access the BP DM feature.

Nathan Gesner · Answer

Companies are increasingly pushing the idea that the credit score alone is not a good indicator of whether the Applicant will pay rent. Part of this is due to legislators that feel credit scores discriminate against minorities, just like criminal records. Companies are creating new algorithms that allegedly give a clearer picture. Someone can have credit score of 575 but still receive a higher "Resident Score" that tells you they are low risk for non-payment.

I don't trust it. As you see, their algorithm is encouraging you to accept someone with missed payments, a collection, and a recent eviction. I see the same thing on my end. In my experience with 400 rentals, credit score is an excellent indicator of whether a Tenant will perform well in the future.

There may be Applicants with low credit scores that would make excellent renters, but they are in the minority. The vast majority have low credit scores because they are financially irresponsible and will continue to be irresponsible. I think there are enough good renters in the world that we don't need to dig through the bottom 10% looking for a good one.

My advice: don't rely on any score, even the credit score, without reviewing the full credit report yourself.

Phillip Austin · Answer

@Mary Smith Yes, TransUnion created the Resident Score, I believe, shortly after the Covid pandemic or within the last 1-2 years.

I currently use TransUnion and also used them when managing thousands of units, however, we never adopted the Resident Score in our underwriting criteria for various reasons. Small, boutique property management companies or investors who self-manage are more likely to build this into their criteria. However, there's currently not enough aggregated data to win over the larger companies since it's a fairly new metric.

Mary Smith · Answer

So the 'Resident Score' is a score that is specific to TransUnion's tenant screening service. It analyzes key pieces of credit data that lead to evictions and is pretty widely used in our industry. We use Innago to screen our tenants and the software does return a resident score, along with a detailed credit report. We do not solely judge applicants based on this resident score, but take a good look at all their credit, criminal and eviction reports before arriving at a decision.

Scott Trench · Answer

Hi Randall - Completely agree that the FICO is not the end of the screening process. Income qualification and eviction history are very important. I also think it's important to review criminal history.

I do not, however use the age, family status, etc. as part of my application process as I don't even want to go near Fair Housing laws and such. The "Story" of the tenant is important, but I feel it is much more sustainable to simple boil the application down to numbers. This allows me to remain objective and not qualify or disqualify tenants on items that could risk being perceived as Fair Housing violations.

And, all adults living in the property must complete the application, and must meet my standards for Credit, Criminal, and Eviction Check. If a tenant wants to move in, they must apply and be added to the lease after meeting my criteria.

However, I do feel very strongly that if I had to pick a single number to boil the application process down to, it would be FICO score. IMO, I mitigate the vast majority of missed/late payments and/or eviction by renting to folks with 650+ FICO scores. It's my non-negotiable, which is why I was so shocked to learn that I was not looking at FICO scores (and perhaps my property manager was not either) when screening these recent applicants!

Only exception would be if one tenant is the breadwinner and has great credit and a clean criminal/eviction history. The other tenant(s) could then, theoretically, have poor credit scores and it wouldn't matter because the one tenant qualifies on their own.

Randall Alan · Answer

@Drew Sygit

Hi Drew,

Regarding why we would still use a 'measuring stick' as to how much income our tenant makes is simply we want to make sure our tenant can afford the property. It's as simple as that on that particular item. Maybe our way is over-simplified by your approach, but we are not pulling credit on our tenants like they are buying the house like you are. It appears you are simply applying the mortgage based solution you learned in that industry to the rental industry... and while there is nothing wrong with that, in some sense it seems like overkill for a rental. At the end of the day is your way more effective? I'm sure! So I'm not going to try and fault you for it, but at our scale a much more simplified approach works as well. While I get that total income doesn't reflect all the bills / debts a tenant has, it works out well for us in that we seldom have to evict tenants that don't have some life-changing event in their lives (like loss of job, etc). Banks didn't develop the 3x income model by accident... I think it likely factors in average cost of living expenses, a car payment, electric, insurance, etc for the typical family.

I will give you that your method is more robust, and likely better as a whole - and if you are operating a large operation I could see where it makes sense...especially if you are representing other owners, etc. We are a 40 unit mom and pop operation, and in Florida we have never waited longer than 4-5 weeks to evict someone outside of a 6 week pandemic hold (it's a pretty landlord friendly state). We have actually gone to bat for our tenants who get behind and help them get state resources (that in the end serves to get us the funds we are owed.) If we were a large operation that would never happen, but we really try to take care of our tenants and see them as more than just a numbers on a sheet of paper. On the way in, we are trying to apply some due diligence to make sure they will be successful tenants - which is what all these conversation revolve around. And it's interesting to see the different methods used. I appreciated hearing how you do it!

Randy

Eliott Elias · Answer

Use go4rent, it charges the tenant $60 and runs everything.

Randall Alan · Answer

@Michael K Gallagher

We don’t target a particular renter, as much as we own more C class properties, with a few B’s in there as well. Our average rent is probably $1,200 for a 2/1 unit… so to that end, maybe that is why FICO doesn’t seem as appropriate to me. If my portfolio was more 2,500sf A to B class properties I could definitely start to shift my opinion where I would expect such a renter to have a better FICO Score and it play a bigger role in my decision making… so yes, what pond you swim in could definitely have an impact there.

Randy

Randall Alan · Answer

@Scott

We would never use age, sex, race, or anything like that. Not sure what 'family status' is in your reply. In fact, for us, a majority of our tenants are non-caucasian. But state law allows you to use the size of the family as a determining factor for suitability of a tenant to a property (at least in Florida).

This is a blurb from Apartments.com - not that they are an authority - but at least a big player:

"While occupancy limits vary by state, the US Department of Housing and Urban Development (HUD) states individual public housing agencies must set reasonable occupancy standards to “assist as many people as possible without overcrowding the unit or minimizing vacancies.” Property managers must “comply with all reasonable State or local restrictions regarding the maximum number of occupants permitted to occupy a dwelling.”

While the specific occupancy limits vary by state and property, many properties employ HUD’s suggested standard: two people per bedroom. Though this standard is not law, HUD promotes this limit as a reasonable occupancy rule for most properties. Likewise, HUD states housing standards “should not be more restrictive than two individuals per bedroom.”

Randy

@Scott Trench

Is it just me or is pulling a Tenant's CREDIT Score Harder than Ever?

Is it just me or is pulling a Tenant's CREDIT Score Harder than Ever?

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