Credit or Income - Which is more important?

Question

I just had someone apply for a rental unit that I own. He is a Boston Firefighter and also owns his own landscaping business. He more than meets the 3x rent requirement for income and I got a good vibe when I showed him the apartment as someone that I wouldn't mind living below me (We're house hacking). However, his credit score is TERRIBLE (528). He emailed me to let me know that his credit is so bad because he's going through a divorce, had to cover a mortgage at a house that he wasn't living in (which has since been sold), and the mortgage took priority over other bills. He also said that his wife opened accounts in his name that he is still being affected by and has averaged 150K/yr income the past 7 years. So, which is more important, the fact that his credit has been ruined from a terrible marriage, or his current income?

Patrick M. · Answer

Divorce can destroy a credit report, lawyers will often tell their clients not to continue paying joint cards while they settle issues.

Credit figures into my considerations but if someone has an issue such as divorce or medical (hospitals can destroy people's credit) then I am less concerned.

This tenant has 2 of my favorite qualities - government employment and divorced. I find that divorced guys feel like they are in heaven when they  go from the headache of owning to the ease of renting.

Chris Mason · Answer

It's relatively rare for someone to make it through a divorce with credit intact & unbruised.

I'd suggest checking out his more recent payment history to see if the chaos is behind him, and see if the story told by the credit report matches the story he is telling you.

His FICO score will eventually recover, and no landlord will hesitate to rent to him at that point.

In the mean time you have an opportunity to rent to a tenant (potentially a long term one) that has been a homeowner, knows what owning real estate is like and doesn't have to be told all the various little things ("that is a clogged toilet. this is a plunger. are you aware you can put these two things together?"), and is currently not a homeowner for reasons other than financial mis-management.

That is of course predicated on the story told by his credit report matching the story he told you. And, of course, no one here has met or interacted with him.

Mike Hurney · Answer

@Michael Zack Did this Jake's credit report confirm his claims?

Michael Zack · Answer

I'm meeting with the prospective tenant tonight to discuss his credit report and debt to income ratio. If I do decide to go with him as a tenant, thoughts on a month-to-month lease agreement rather than a 12 month lease? The only thing that worries me about that is a tenant moving out during the winter months and me being stuck with a vacancy until the spring.

Frank Chin · Answer

You should have no problem with this guy. Had plenty of these guys through the years, including some that went into bankruptcy because of it.

The most important thing for me is to meet them and get a feel of the person.

Jessie Niu · Answer

I don't really care about credit scores much when screening a tenants, my rentals are in C area and unfortunately most of those renters have low credit scores, which don't necessarily make them bad candidates. So far, all my tenants are great with no issues.

Wes Butler · Answer

Having looked at credit reports for many years of my finance career (for underwriting collateralized loans -- not for real estate or property management), I can tell you that I have seen low scores right now, then be in the low 700's only a year later. There is a lot that goes into a score, and a low score is not always about delinquencies. If there are delinquencies, then you should be sure that the age of his credit lines that are delinquent match up to his story. I would also ask for tax returns going as far back as I can get. This will show you his cash flow history, but if he is like many small business owners, he may be showing a loss or limited profit (landscaping is probably a cash business). This can be mitigated by looking at his bank statements and match them up to his tax returns.

Finally, my thought is that since this is a house hack, this means his rent is probably on the low side compared to renting a complete apartment, so I would expect him to eagerly pay on time to stay in the unit and keep his expenses low. As Josh Dorkin is quick to point out, this is a business, if the tenant is late on the rent, then file for eviction as soon as you are allowed by law. Making this clear to the tenant will train them to be responsible with paying the rent.

With all that being said, I am not a landlord, so verify this advice before relying upon it.

Wes

Mike Hurney · Answer

@Michael Zack At the registry of probate, is there a Divorce filed? If he paid the Mortgage on time does that show? The credit lines "she" opened, were they obvious? You may want to speak with a Mortgage guy that can read credit reports...

Basically you've got someone that should not be considered but you are considering him by a "story" (extenuating circumstances).

PS Have you confirmed his employment?

Credit or Income - Which is more important?

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