First time screening tenants - how bad can their credit be?

Question

Hi,
I'm relatively new to the landlording business.  Bought my 1st two units about 18 months ago and inherited tenants that are actually pretty good.

This is my first time screening tenants to fill a vacancy (3 br/1.5 bath $1250 rent) and I thought I had 2 promising applications.  They both have income that exceeds the 3x rent requirement but their credit is horrible.  The 1st family has multiple judgments from landlords so I crossed them off.

The 2nd family has no landlord judgments and current car payments but lots of accounts in collection (mostly student loans) even though they have a combined income of over $120K.  Is this the kind of credit I can expect from most of the applicant pool?

What kind of accounts do you ignore from the credit reports?

Bob Hines · Answer

It depends on what is on the report, not the number. I ignore anything medically related. It has not come up yet but I would also probably ignore student loan debt as well. I am not ok with previous rent collections though. While I didn't always at the beginning, I have started to pay closer attention to late payments or collections from utilities and using that to weed people out as there have been some problems there. It may seem ok to put the electric bill in a roommate/boyfriend/girlfriend's name until there is a problem and they move out-the remaining tenant has to come up with the $400 they previously didn't have in order to get the electric turned back on. Other things on their reports, car payments etc all depends. What I do, and I would suggest with your $120k with student loan collections, is to call them out on bad items on their report. Ask them directly why they didn't pay their student loans, car payment, gas bill etc. I won't necessarily believe what they tell me but what I am looking for is how they react and handle themselves to the question/situation. Do they own up to it or blame somebody else for it? Are they ashamed or nonchalant? Do they know the answer or do they need a moment to think of an excuse? Was it a plausible reason-divorce, unemployed at the time, a know it all 19 y/o etc? Then make your decision based on that.

Also, make sure you follow the law with the 1st family. If your only reason to deny them the place is their credit report, you need to let them know and give them legal paperwork that they can get a free copy of the report you used to deny them occupancy. Hopefully your screening service is on top of this for you.

Also, make sure you follow the law with the 1st family.  If your only reason to deny them the place is their credit report, you need to let them know and give them legal paperwork that they can get a free copy of the report you used to deny them occupancy.  Hopefully your screening service is on top of this for you.

Steve Babiak · Answer

The question to ask an applicant is: "What types of things will I be seeing when I perform my background checks on you?"

If they know, and tell you - then at least you know up front that they aren't trying to deceive you.

If they say nothing bad, and you see bad stuff - then you have good reason to be concerned.

If they act like they don't know what will come up - that is one that's tough to believe if bad things show up, because the bad things usually lead to the creditors contacting the debtors many times trying to collect.  If nothing bad shows up, then that's an OK answer.

Bob's answer above is pretty good IMO.

James H. · Answer

I would expect credit issues from most renters that have a long history of renting. It took me a while to determine what my credit criteria was going to be. Shoot, it took me a while to determine my criteria for general stuff outside the credit score. What I settled on is that the credit report is just another tool for me to verify the OTHER stuff on my application that is more important to me. Their credit score is all but irrelevant to me. If they have good rental and work history, I don't really care what their credit is. The credit report does help somewhat in verifying prevoius addresses (not 100% reliable, but still helpful)and identifyng collections from apartments or the like.

That being said, I am always careful to try to determine WHY they are moving. That has been one of the most important questions for me to ask. A lot of times the sh** they are getting into that is causing them to move is too fresh to show up on a credit report. I also verify that they are not breaking an existing lease to start a new one with me - I don't care what the reason. If I miss out on a tenant with a legit reason for breaking an existing lease, I will take that loss to avoid all the other trouble makers and make the decision simple and easy.

My current tenants had their home forclosed on. So of course their credit was garbage. But the bank could verify good payment history up to the point that coincided with the tenants reason for why they had to let their house go.

I had some other applicants that were looking pretty good until after checking their credit (and even their own personal references) that their address history was not the same as they claimed. I used this knowledge to ask some questions and uncovered all kinds of things they omitted from the application. It wasn't really stuff that I couldn't overlook, but combined with their dishonesty about it, I couldn't give them a green light.

Joel Owens · Answer

If they just completed a chapter 7 it can actually be a good thing.

They cannot refile for 8 years and are starting with zero debt (certain items such as child support,irs taxes,some student debt cannot be wiped out).

So I would look for that kind of debt even after a seven to assess how much debt they are stuck with.

My experience has shown judgements,evictions,criminal history no matter how old is a no go.

Even if the person is clean now they tend to have family members of friends that still get in trouble and bring the bad element around.

Jeff S. · Answer

The best borrowers get the best loan rates. If you want to squeeze the max out of your rental unit you will need to open your pool of applicants, just like subprime lenders did for bad credit risks to get poor people into housing.

Guess there is something to be said for renting to someone who lost their house. In some areas that is the primary source of tenants.

Personally, it is important to me to rent to people that take paying their bills very seriously. In return, I give slightly better than market rents.

The laws just keep moving in the direction of protecting people who think nothing of screwing someone because they are perceived as having wealth.

Nick Hubers · Answer

It can even be worse than that. You should not consider only that. Consider everything about the applicant, all the circumstances around the bad credit. If I am presented only that information, I would immediately cross them out. But like I mentioned earlier, check other details. Get as much as you can. If you see that the applicant can be a risk to your business, you know what to do.

Terri Pour-Rastegar · Answer

If everything else looks good, I would probably ignore extensive student loans and medical bills.  I do agree you should confront the tenant about it.  A good, open-ended statement like, "tell me about these unpaid student loans," will get them talking without putting them on the defensive.  Avoid questions with only yes or no answers.

On the front end, I am very stingy with my applications.  I keep them out of sight while showing properties.  Prospective tenants are handed an info sheet on the property, the flip-side of which has a list of tenant requirements.  I explain that, while some of these items are not hard-and-fast rules, and I do look at the bigger picture, they are a guideline.  If they seem interested, or ask for an application, I reiterate that prior evictions and certain criminal convictions will be immediate grounds for denial.  If they're OK with that, and I like them, I ask, "what sort of things might I find when I run credit, criminal, or eviction reports or run your references?"

I have a strict rule of running credit/background/eviction reports on absolutely every applicant, after I've inspected their application info and confirmed employment and gotten landlord references done.  No exceptions.

I hope everything works out for you.

Alan Mackenthun · Answer

I've got newer 3+ bedroom, 2+ bath, 2 car garage townhouses with higher than average rents.  I get almost no applicants with decent credit.  Like others said - try to confirm that they prioritize the rent.  Interview them and be sure they're not lying to you.  Then take a chance, because there are no guarantees.

David Beard · Answer

I'm sort of surprised that you even took an app from the first family.  Did you tell them on the front end that you would pull credit, judgements/evictions, etc., and ask them if there's anything to be concerned about?

My property manager screens all tenants.  She has several hundred units.  She does not even pull credit these days, says everyone has bad credit.  No doubt after millions of foreclosures and SS's, and 10% unemployment, that is very true (and bound to get worse with another 4 million homes in some stage of severe delinquency).  She focuses on evictions, criminal records, employment record.  The standard advice is that as long as they "prioritized" their rent expense in the past over other bills, that's a big plus in their favor.  I suppose...

Rob Gillespie · Answer

Denise,
What is the price and area of the home. My inner city stuff  I don't worry much beyond eviction and landlord judgements, the suburban stuff I usually pull better scores. With so many years experience, I have learned to read people pretty well, I can usually tell within a few minutes of talking to them if they are gonna pay. :mrgreen:

First time screening tenants - how bad can their credit be?

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