prospective tenants with high debt to income ratios

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prospective tenants with high debt to income ratios

Jestin Sorenson
Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes

I have a couple applicants that are married with a newborn baby. She plans on staying home with the baby. They both have mid 700's on the smartmove application, which I think is really good. They both are college educated and would seem after talking to them, that they would be great tenants.

I'm fairly certain they will both have good rental history. They've lived together for their past 3 places. I am still going to do my do diligence and check those references. I called today, but I think it was too late and nobody picked up the phone.

However, I'm more concerned about their debt to income ratios. The woman owes 75k and the man owes 101k with 14k of that revolving; the rest student loans. The man hasn't paid his student loans in 4 months. It's not late. It just says N/A. The woman's is spotty. She has N/A for many months and then she'll pay for months.

I've had student loans before and that generally means that it was deferred or forbearance. You can get up to 5 years forbearance and I'm not sure about deferred. 

He makes 3.7 times the rent gross, but from his w-2's, after taxes and other taken out, it's $2100 every other week. The rent is $1000. From what smartMove says, they're student loans, revolving and rent would be $2600. That's -$500 not counting utilities and car insurance, and whatever other bills they might have.

They pay $950 a month at their current residence. 

Based on the numbers, I'm thinking no. They're a ticking time bomb. I don't have too much experience with having tenants. I just bought a duplex and am renting out the other half. Any insight into this would be much appreciated! Sorry for the long post. I wanted to make sure I got all/most of the facts in there.

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Anthony Hurlburt
Salt Lake City, UT · Member since 2016 · 199 posts · 190 votes
9y

Make sure that you are not rejecting them because they have a child.  That is illegal.  You should have set acceptance criteria that you follow.  If they meet it and you reject them you are opening up yourself to trouble.  If you can reject them based on your rental requirements you are in the clear.

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  • Amber Gonion
    Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
    9y
    Too much analysis not enough predetermined criteria. Have your criteria, if they don't fit move to the next applicant.
    2Reply
  • Jestin Sorenson
    OP
    Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
    9y

    @Amber Gonion Could you explain more. In terms of criteria, how would you determine this within your criteria? I have a catch all statement that says the tenant must exhibit a financially responsible lifestyle. My main criteria are you must have a minimum 600+ credit score. We do background checks and you must make 3x the rent. I've got a whole list of criteria that I give to them in text that I print out. I tell them to read it, but it's kind on a case by case basis in terms of credit and background bc there are so many different cases out there.  I may not deny you if you if you have a DUI, but I will deny you for domestic violence. I cannot narrow it down for every scenario out there. I analyze the report and determine on a case by case basis whether, in my mind they exhibit a pattern of financial responsibility and in this case they didn't.

    If you have an example of how you would do things differently, it would be great if you could share.. should I be more specific with my criteria. I can't just say that the applicant must have a good debt to income ratio. The problem is they are not paying their student loans and are using credit cards to stabilize their income and lifestyle. 

    It's all about the type of tenants you get in that will determine your life as a landlord. Do you want problematic tenants that make your life stressful or do you want decent tenants that pay their bills on time and don't bother you often?

    I am new to being a landlord but there are a few people on here that agreed with my decision.

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

    I actually prefer a CHECK - - writing a check which bounces makes the applicant subject to Back Check laws which is treble damages of the face value.  I would just as soon know this day one and get them out asap.

    If I can't verify employment, income or last residence, then the topic is moot - - the don't pass screening.

    1Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Jestin Sorenson Your "exhibit a financially responsible lifestyle" is exactly what you can't say.  This is 100% subjective! What you think is financially responsible is quite different than what others would think is financially responsible.  You should list your 600+ credit score and 3x rent criteria as these are objective measures.  However the tenants you just said didn't qualify would have met both of these criteria.  Your subjective analysis is what made them fail this category.

    I would watch who you take advice from on this site, with the good there is also a lot of bad information.  Just because a couple people agree with you doesn't mean you are correct.  One of them said they would not rent to 20yr olds which we both would agree is age discrimination.

    Those of us on here who disagree with you are not doing it to make you look wrong, we are doing it to try and help you.

    2Reply
  • Amber Gonion
    Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
    9y
    Your criteria will determine the type of renter you get. Your criteria should be written, strong enough to weed out bad tenants and open enough to rent the unit. We teach a class once a month for new investors and go over this and other things to get started in investing. Often on the forums I hear landlords saying that they fired their PM because they were not selective enough. In this business you need to have a process to get good tenants not choose one over another. If you have strong criteria you should be selecting he first person that submits their deposit (cashiers check/money order) with their application. Choosing criteria or tenants on an individual basis is in violation of fair housing. You only need one person to complain to open a HUD investigation. It is like speeding, you can get away with it for a while, but eventually you will get caught if you do it enough. As you grow your business you don't want this liability. Set up a good strong process. Whatever you decide on criteria it should be standard and written, for sure not selected by you depending on the potential tenant circumstances. I have managed over 200 units at once and I will tell you that most times criteria will weed out bad people, but nothing in guaranteed, some people looked like they would be trouble but they passed the criteria and were never an issue.
    2Reply
  • Jestin Sorenson
    OP
    Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
    9y

    @Jeff B. The laws might be different in California. If they move in and the check bounces, not only do you not receive any money, but you have to pay for an eviction. From what I hear, it's not easy to collect money from tenants after they've already moved out. You'd be lucky to get a judgement and if you used a collection agency, you'd prob get a small percentage of what you were owed. I would never take a check on move in, unless it was a cashier's check or similar/same as cash.

    @John Woodrich I get what you're saying and thank you for the advice! I see you have good intentions.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Jestin Sorenson:

    @Jeff B. The laws might be different in California. If they move in and the check bounces, not only do you not receive any money, but you have to pay for an eviction.

     After 19yrs don't you think I know that ... But the issue becomes a Misdemeanor Check Fraud case, not just UD.  I would rather know now than 3-6 months later. So far, I've only need to go to court 3 times in that period (1/6 years) and even as a remote landlord, I am fine with that.

    Not everyone who disagrees with you is your enemy. I'll not pester you any further in your new career as a LL.

    1Reply
  • Jestin Sorenson
    OP
    Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
    9y

    @Jeff B. I'm sorry about that. I have trouble deciphering people's intent with text and everyone has an opinion and thinks they are right. No worries. I'm not mad. Sometimes I can be defensive, especially when people under estimate me, not saying that you were. You're not bothering. Thanks for your feedback :)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    9y
    Originally posted by @Jestin Sorenson:

    @Tim Swierczek 

    ... 

    Some reasons for denying them. I wasn't able to verify their income. That's reason enough right there. I didn't include that information bc it wasn't relevant to the question I was asking in this forum. They also didn't have the deposit upfront. They gave me some excuse saying that their bank was in Iowa and that they couldn't get a cashiers check. They were breaking a lease after a little more than a month to move into my place. I have more than enough reasons to deny them, but I don't want to deny quality tenants. All of the qualifications were given to them in a handout with the application. I told them to look it over and make sure before applying. I will look more into student loan debt and the rules and regulations. Thanks for replying.

    First, your declining to accept them is something I agree with - the three reasons in the quoted post are three that I would have used as justification also.

    My suggestion is to put those three reasons into your rental criteria. Something like this:

    Income - minimum gross monthly income of 3 times the rent; all income that is to be considered must be verifiable.

    Applicant must have proof of move in money of first month rent and security deposit in order for application to be processed.

    Landlord reference required; applicant must be in good standing with current landlord.

    Don't use my wording - put together your own based on the idea I am showing you. And I suggest you add a DTI metric - something along the lines of "net monthly income must be sufficient to cover all monthly expenses that applicant will face as tenant, including but not limited to things such as rent, expenses from credit report, transportation, and utilities."

    1Reply
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