Should I rent to tenant with 540 credit score

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Should I rent to tenant with 540 credit score

Bill Briscoe
Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes

I have 1 property which rents for an above avg $1275/mo, SFH, tenant pays all utilities, yardcare, etc. We did a full reno 3+ years ago and have a mtg so cash flow is only about $450/mo.

So far we have had 3 tenants - all of which have been very responsible and had credit scores over 700.  Now it is vacant again and our only applicant in 6 weeks has been a single mom, 2 older kids, recently divorced, and with a credit score of 540.  Income is $50K so she makes the 3x ratios barely, but that comes from 2 jobs, the 2nd of which is a newly opened bar so she only has 1 paystub year-to-date.  The other job is leasing manager at her current apartment.  She pays that rent "on time" but it is a payroll deduct, so it would be hard/impossible to pay it late.

She is very interested, and paid the $39 background fee check, so I want to work with her, but don't want to take on a completely stupid risk. Thoughts on this one? 

Would you approve her?

Ask about a co-signer?

Deny application initially but offer approval with deposit plus 2 months rent up front?

Something else?

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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y

1) verify all income AND employment

2) pull a full credit report and look at 30,60,90 day lates;  verify there's NONE in the last 6 months.

3) how many and what kind of collections are on the account?

Life gets messy and the FICO means JACK as to what kind of person she is and her level responsibility.  The fico of 700 for the others has nothing to do with her 5xx.

Question is: what could/can she change vs how has she been reacting to circumstances?

Being thorough and careful, you can get a loyal and reliable tenant.

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  • Kristopher HanksPro Member
    Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
    9y

    Simple answer from me is NO.

    6Reply
  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    Has the rent been raised on the property this time around? Just trying to figure out why no good, qualified applicants this time around. 

    IF you accept the single mom, I would only do with first, last and security. Other than that, I would move on....

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    3Reply
  • Frank Klarich
    Flower Mound, TX · Member since 2016 · 30 posts · 24 votes
    9y

    Bill, I am interested in hearing other people's advice and thoughts on this.  I don't have enough of a background to provide you with, but I can tell you are contemplating it for 2 good reasons: 1. vacancy, 2. you have a heart.  Here are some additional questions I would be asking myself in this scenario:

    - How tough would it be to evict her/family should it go bad?  I imagine Oklahoma is likely a bit more landlord-friendly (but I do not know.)

    - Why does she have a 540 credit score...what caused it?  A better understanding of the cause may help you arrive at a more informed decision.

    - Prior to where is she living now, does she have references, etc.?  Can you put a better credit picture together?

    - Do you need to deny, then condition the approval, or just issue a conditional approval that requires $x security deposit and $x rent upfront...?  Even if you do so, can she even come up with that?

    - If you lowered the rent a bit, would that entice a better class of renters to potentially apply?  You've already lost out on 45+ days of rent....

    Again, there are much more experienced folks who I look forward to hearing from, but these are certainly questions/scenarios I would consider.  Good luck...will be interested to hear your decision.

    6Reply
  • Christian Robbins
    Salt Lake City, UT · Member since 2016 · 15 posts · 12 votes
    9y

    Heart says yes, brain says no. There's a lot of people who are broke from listening to their hearts. 

    9Reply
  • Sebastian Taylor
    Baltimore, MD · Member since 2013 · 85 posts · 28 votes
    9y

    There is only one right answer: 3 previous tenants had a score above 700, the 4th should be comparably the same, unless the area changed.

    5Reply
  • Jill Carroll
    Boise, ID · Member since 2016 · 3 posts · 9 votes
    9y
    Having been a single mom with nowhere to live a few times and a landlord once. Absolutely not. When I was a single mom post divorce my credit score was still 670. It is heartbreaking to have to say no but it will be more so when she doesn't pay and you have to evict her. In my short 2 years as a landlord letting people play on my squishy heart was a huge mistake.
    9Reply
  • Danny F.
    Waianae, HI · Member since 2016 · 111 posts · 47 votes
    9y

    How much was she paying at the previous rental?  If it is or close to 1275 that is a plus.

    Definitely speak with her previous landlord, how long was she living there?  Do you know why she is leaving?

    I had a bad score at one time of 560 and I paid my rent for 3 years on time.  My circumstance was I co-signed for a relative who defaulted which effected my score, Didn't mean I was a horrible person hence finding out about the score may help you decide.  My score currently is 760.  Sometimes a score doesn't define a person.

    You could have a clause that states you will have a home inspection once or twice a year.  My landlord had it once a year. 

    With our family rental property we inspect it every 6 months. 

    Find more back ground on the potential tenant.  Are you okay waiting for another 6-8weeks or longer w/o it being rented?

    Is the location of your property have tourist attractions?  Could you look at it becoming an Air BnB rental.  Lots of maintenance but if you are at a good location you can make more then $1275. Just thinking out of the box

    Best wishes and aloha,

    Danny

    6Reply
  • Heidi Hughes
    Rental Property Investor · Berkeley, CA · Member since 2016 · 25 posts · 6 votes
    9y

    Hi Bill,

    I am an investor in Tulsa.  Renting this time of year is very difficult and the pool of tenants are not very qualified.  I just rented a place in November and I am doing a 6 month lease to avoid vacancies this time of year.  You have decide if it's worth taking a chance or leaving the place vacant until you find someone better.  I found a lot of college grads start looking in April. 

    I currently have a low credit score tenant due to their student loans.  So far so good with them.  Maybe do first, last and security deposit and a six month lease?  

    Heidi   

    1Reply
  • Michael Bertsch
    Bossier City, LA · Member since 2015 · 122 posts · 50 votes
    9y
    I understand the situation you are in, but you have to treat it like a business and leave emotions out of it. You are opening yourself up to more risk if you allow her in your property. Since you have not had any prospects in 6 weeks, you may need to lower the rent a bit bellow market because of the time of year. I would do a 6 month lease so it ends during the summer and then raise your rent back up. Get back on a 1 year lease. I don't like leases ending during the Holliday season.
    1Reply
  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    Her credit is too low and she just had a divorce, you're asking for trouble.

    3Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    1) verify all income AND employment

    2) pull a full credit report and look at 30,60,90 day lates;  verify there's NONE in the last 6 months.

    3) how many and what kind of collections are on the account?

    Life gets messy and the FICO means JACK as to what kind of person she is and her level responsibility.  The fico of 700 for the others has nothing to do with her 5xx.

    Question is: what could/can she change vs how has she been reacting to circumstances?

    Being thorough and careful, you can get a loyal and reliable tenant.

    15Reply
  • Kristopher HanksPro Member
    Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
    9y

    @Jeff B. has some valid points. If you do decide to rent to her only offer a month to month lease. Protect yourself. 

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    9y

    I would say No. Id also be less concerned about credit score and more about income stability. People dont like to be homeless so will usually pay rent before other bills. This hurts credit score but you dont care. However, lack of income is a big flag. Plus single mom means no back up income from spouse. Too risky.

    1Reply
  • Bill SchrimpfBusiness Member
    Real Estate Agent · Reno, NV · Member since 2014 · 349 posts · 189 votes
    9y

    What is your policy (it written, right?) regarding tenant approvals?  

    Making a decision in any other way may expose yourself to defending an equal housing complaint based on the PERCEPTION of denying housing to a person in a protected class.  

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    4Reply
  • John Moon
    Palpark, NJ · Member since 2016 · 69 posts · 11 votes
    9y

    Lot of great advice and suggestions to think about here. I'll just add one more. 

    What is the minimum credit score you're willing to lease the place to? Also there are other options for you to guarantee rent. Can she pay the full year or half year rent up front? (maybe she has a wad of cash from her divorce). 

    Try to think of other ways you can protect yourself instead of simply saying no. 

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Bill Briscoe  I have to agree with some of the above posters.  I would see why her score is low.  lots of people have bad credit from medical expenses.  I might be a little more lenient with that than some other things.  Also remember that credit score reflects her and her EX together.  she by herself could be worse or better.  My instincts would be to pass on her  The thing Im not sure about is your saying this is your 3rd vacancy.  In how long of a period of time??  three tenants that passed your screening with good scores left.  why?? did they buy houses?  is the rent to high?  its difficult to fill a vacancy this time of year.  why did your last  tenant leave this  November?  Surly you didn't have a lease expire that time of year.  most people don't move around much during the holidays.  I wouldn't get too excited yet.  somebody will come along but it could be a while.    If you really need the tenant and chose to rent to her I would do it M2M.  Its faster and cheaper than an eviction, at least in my area.  the long term lease protects the tenant more than it does the landlord anyhow.  that might eliminate the need for 2 months rent up front.  make your month to month lease with a clause that states the rent is due on the first, if received by the __th the lease renews.  If the rent is not in by the __th the lease is expired, and she must be out by the __th of the following month??  I don't know if a lease of this kind is legal in your state im not a lawyer.  Im just trying to think out of the box here.  I would not sign any long term lease with her.  3 months Jan through March Maybe?? then go to M2M or something.    RR     

    1Reply
  • Rhett TullisBusiness Member
    Property Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
    9y

    a couple things I see

    -the market here in okc is down so the number of applicants to pick from are also down i have a feeling your area is similar.  this is not just seasonal in my opinion but economic just keep that in mind.

    -as a PM I would recommend not renting to a PM.  lots of reasons behind that I can share from personal experience.  

    best of luck as you choose.  

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    2Reply
  • Kyle R.
    Real Estate Investor · Charlotte, NC · Member since 2016 · 92 posts · 103 votes
    9y

    I recently rented to a very similar renter. Single mother, one older kid, credit score was 550. I rented a condo to her for $1,250/month. Only reason I looked past the credit is due to the fact her income was $90K and had stable employment. Also, she had no current accounts in collections, active judgments, or eviction history. If her income was $50K, I would've turned her down.

    1Reply
  • Cary F.
    Investor · Lakewood, OH · Member since 2016 · 203 posts · 191 votes
    9y

    @Bill Briscoe

    I will tell you how I view this from my experience in the banking industry. I do quantitative analytics for large consumer portfolios at a commercial bank. We build account management strategies which are dependent on many things, but are almost always dependent on credit bureau score (cb score). 

    First of all, a low cb score automatically means that an account is a higher credit risk. For origination purposes, we usually don't lend to applicants with low cb score. For collections purposes, we always treat low cb score accounts more aggressive in how we contact them. The point I'm trying to make is the lower the cb score, the higher the credit risk. Leasing a unit is a form of credit. The applicant should therefore be screened based on your credit risk underwriting standards. 

    More importantly is considering what a low cb score actually means. It means that you as a landlord will be standing in line to get paid by the tenant. A low cb score means that there are many collectors trying to get paid by this prospective tenant. Therefore we can assume that the tenant is constantly making decisions on who they must pay first.

    Because of these things, I would continue to search for a tenant that presents a lower credit risk to your business. 

    Thanks,

    Cary

    2Reply
  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    Hi @Bill Briscoe,

    I rewrote your initial post a bit to only take in the things you can legally consider. (and what I recommend you consider)

     Now it is vacant again and our only applicant in 6 weeks has been an individual applicant, with a credit score of 540. Income is $50K so they make the 3x ratios barely, but that comes from 2 jobs, the 2nd of which is newly opened so there is only 1 paystub year-to-date. The other job is leasing manager at the current apartment. That rent is "on time" but it is a payroll deduct, so it would be hard/impossible to pay it late.

    I am not trying to be the fair housing police by any means, but removing any items that can be considered biased, you have an applicant who has a very low score, poor job history with the new place (one pay period). Is part of the compensation of the other job an apartment? If the applicant moves are they still working there? 

    3Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    9y

    You said one of her jobs is at her old apartment.  When she moves is it safe to assume that income will not continue?   Then you're left with only the new job, income doesn't sound too steady.

    You really do need to look at the credit report to see how many recent lates and collections she has.

    Regardless of that it still sounds risky.  Does she have any money in the bank?

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    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Bill Briscoe a single mom working two jobs with older kids? So the kids are left home alone while she is working and who taking care of your home? Is there child support payments and if so, that legally needs to be included as income. I have rented to several single parents and without two adults in the home, there is always more wear and less care. The reality is that being a single parent you have less time to clean and care for things such as the lawn. I would never exclude a single parent for that reason, but I also wouldn't lower my standards to accept one.

    The other concern is does she keep the job as leasing manager, now that she is not living there? You can ask her employer that question directly and I would. 

    The easy thing to do here is reject her based on credit score. I know it is tempting when you have vacancy to lower your standards, but you know that is not the right decision. 

    1Reply
  • Account Closed
    Investor · Birmingham, AL · Member since 2015 · 45 posts · 10 votes
    9y
    I would say it depends on if she had a good pay history before the divorce. If she had poor pay history her entire life then no, but if her poor credit is limited to the time period of the divorce and she had good pay history prior to that then I'd say rent it to her.
    1Reply
  • Bill Briscoe
    OP
    Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
    9y

    I haven't lost any rent yet. Current lease expires at EOY but the tenants moved already so I've had it listed since they gave notice. 

    Yes this is a hard time of year. I don't think lowering the rent would get me a better tenant pool, but more likely a larger pool of a lower quality. 6 mo lease is a good idea. 

    For this prospect 50k isn't a lack of Income. That's doing pretty well, though it isn't much cushion. Her credit shows two small accounts in collections - couple hundred dollar each. I think she said one was her ex phone bill which She disputed and never paid. She says she has always paid rent on time- and no evictions are on her record. 

    She did have some late payments on school loans and her car loan was once 90 days late but is now current.  

    Could that be signs of a one time lack of liquidity during the divorce or of a recurring issue?

    Her current rent is $1020, but she gets an employee discount. Getting into a house is her goal. 

    0Reply
  • Bill Briscoe
    OP
    Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
    9y

    Mike Cumbie: Good points.  Yes, I think we have enough strikes to decline based on lack of sufficient income history.  Also her payment history has a lot of gaps in the report - student loans from 2005-08, transferred to a $10/mo DOE consolidation since 2011 (which is current, but its peanuts), then nothing until an auto loan in 2014, which was seriously past due but now current.  Big gaps from 2008 thru 2014.  Maybe paid cash for everything or her ex husband paid bills?

    Being single/divorced doesn't bother me - she just blamed the low credit score on her separation/divorce.

    1Reply
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