Replacing no credit history with larger deposit or cosigner?

Question

Hi BP! Question on screening. I am just getting the second unit of my first investment property (duplex) done and hopefully rented out very soon! After advertising and sifting through applicants I have 3 bible school kids that want to rent the unit. All have are young (19-20) and have good references and verified income to meet the requirements. My problem is two of them don't have any credit history. When they tried to send credit reports with Cozy it wouldn't let them. Regardless I like these applicants and really want to get them in there. So I'm debating now whether I should ask for a higher deposit or require a cosigner for the two that don't have any credit. Also, If I did accept a cosigner I'm not sure how to handle that on the lease.

Any thoughts?

Thanks in advance

Any thoughts?

Thanks in advance

Roy N. · Answer

@Justin Langdon

We rent to a lot of students and this is common - typically they have no or insufficient credit history  ... and, if they do have one at that age, its frequently not pretty.

We ask the candidates to provide a guarantor.  We conduct a credit history and income verification on the guarantor and, if the results are sufficient, we execute a separate guarantee which is attached to the lease as a schedule.

We use guarantors as opposed to co-signers due to the fact that a co-signor enjoys all of the rights of any signatory to the lease - such of right to access - which does not go over well with housemates, when helicopter-parent shows up unannounced on a Saturday morning.   As a guarantor they have the right to know whether their charge is in good standing w/r to his/her obligations under the lease and the obligation to open their wallet should junior mess-up.

Nathan Gesner · Answer

This is an opportunity to develop a policy. What's the point of screening if you intend to waive it every time someone comes along that you think is nice? If these kids are who they represent themselves to be, it will work out. But what about the next time?

I use a score sheet that objectively scores them on credit score, income-to-rent ratio, Landlord references, etc. That score determines if they are denied, passed, or passed with conditions. A lower score means they pay 1.5 or 2x a month's rent for the deposit because they are higher risk. It's objective and requires little/no thinking on your part.

Long story short, I would only approve them with a double deposit. I do not use co-signers because it's far more trouble than it's worth.

James Mc Ree · Answer

Leases are often first, last month's rent plus security deposit.  Consider getting the last 2 month's rent as consideration for no credit (first, last * 2, security).  Double security deposit could be good as well - watch out for state limits.  Mine limits landlords to 1 month after year 1.  You may bump into limits of what your prospects can afford.

Good advice from Nathan G. above regarding having a policy, documenting it and following it.  You could leave yourself exposed if you decline them for lack of credit history, but have no policy stating a credit history is required.  Your policy can allow for mitigations, such as the additional payments, for an applicant that scores low.

Beware of self-bias.  It looks like you have other applicants.  It seems like you could get even more good ones if you were to decline the first batch completely.

Check how much they've learned about independent living if this is their first move out from their parents houses.  I had a set of 3 young people as tenants who literally had no clue:

• The light doesn't work.  There was a great big flash, then it stopped working.  I turned the switch off/on multiple times and it still doesn't work.  Please come over and fix the light.
• The plugs keep falling out of the outlets.  Your outlets are broken.  Please come over and fix the outlets.  (I bent plug prongs inwardly slightly to solve problem.)
• The water stopped going down the toilet.  Your toilet is broken.  Please come over and fix it.
• Someone from the government stopped by and said your grass is too tall and you have to cut it.  (I point out lease says tenant is responsible for grass.)  How do we cut the grass?

I think they all occurred within the first 3 months of my first ever lease.  They are all falling-over-laughing-situations except when you are the landlord and the tenants are serious.

Michael Noto · Answer

@Justin Langdon The co-signers go through the same screening process as the tenants and go on the lease just like the tenants do.  If the ship goes down, they all go down with it.

Just make sure the co-signers have solid credit and enough income to accommodate their expenses and the tenants expenses should they need to step in and help financially.

Thomas S. · Answer

I personally prefer the co signer route. When I screen applicants I have two goals in mind. First to find a tenant that can pay and second a tenant that I can successfully take to court to collect when they do not pay. When it comes to students I prefer the protection of full payment over risking that any amount of deposit may not be enough. You must also check your state codes. In most jurisdictions deposits may only be used toward damages and may not be used to cover lost rent.

Normally a co signer/parent is more responsible and personally concerned about their credit and reputation. They will step up rather than risk the damage to their credit.

Replacing no credit history with larger deposit or cosigner?

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