Tenant credit report - good score + high debt?

Question

I am currently screening tenants for an upcoming vacancy.  I found a tenant that initially sounded great, but some details on their credit report worry me.  While their credit score came back as excellent (~720), they have a large amount of debt (~260K total).  There's about 25K credit card balance, 60K car loan, and the rest all unsecured debt from various banks or online loan agencies.  All of these loans were taken out recently in the past 3 years, one as recently as 3 months ago.  Overall, it totals about 9K/month in payments.  However, the tenant has no missed payments, and has been employed as a Nurse for 10+ years with a current salary of 230K/year.  I'm not used to dealing with high income applicants like this, and not sure if this is something to worry about.  I plan to ask them more questions about this, but wanted to get some advice from others who may have more experience with this type of applicant.

Tim Herman · Answer

@Neal Boroumand Look at it logically. He brings 19k per month gross. 9k goes out. He has 10k to pay rent and live. Would you rent to someone with 5x your monthly rent. I am happy at 3x rent and credit above 650. Unless you are selling him the house I would accept him.

Neal Boroumand · Answer

Thanks for all the replies everyone.  It seems like I need to come up with some DTI criteria to judge the applicants on.  If I look at what most banks use for loans, it needs to be less than 50%. From my calculations, this applicant would be at (8600payments+1900rent)/19500income = 54%.    @Kenneth Garrett it sounds like this would be above your threshold and you would reject the applicant, correct?  @Tim Herman/@Nathan G., you both seemed to suggest the applicant is qualified, despite the higher DTI.  Do you have any upper limits to what an acceptable DTI should be?   Just like credit score, I know every landlord will have different thresholds based of the quality of the property/location, but just a general level would be useful.

Neal Boroumand · Answer

@Tim Herman Thanks, I agree with your logic and we're going to move forward with him and see how it goes!

Theresa Harris · Answer

$9K/month in debt repayment and an annual salary of $230K/yr.  WOW.  If they've been making payments on that debt at the income level for 3 years, it suggests they can make the payments.  Talk to their current landlord and find out if they've been paying the rent on time.

Andre Taylor · Answer

Being that this prospect tenant is in a recession proof job and has a long employment history and has never missed a payment...I dont see no issues with renting; especially if their previous landlords confirms good rental/payment history. Medical professions are making so much bonus money and incentives during this pandemic and this will be like this for awhile so that could be why they increase their debt.

Greg M. · Answer

The credit card debt isn't concerning given the income of the person. Besides, you never know what it is for. I put a car on a credit card once because the credit card company offered me a crazy low interest rate that was lower than the dealer financing.

The auto debt is completely reasonable.

Could the unsecured debt be student loans either for the applicant or their child?

Charley C. · Answer

@Neal Boroumand DTI is always something you have to keep in mind but also give equal weight to the applicants history (scores are not everything but history is). What is your applicant used to paying? is your rent rate a lot more? If its the same rent amount, I doubt you are going to have an issue

In the event your tenant is short on money, make your lease agreement the last thing she wants to be late on. First 3 days its $20 a day, then after 3 days its $100 a day is one way to stay at the top of her payment priorities. Those unsecured loans would move in front of you for anything less.

There are reasons people rent instead of buy, that high (but manageable) debt will keep her from moving out to buy a home so far as I can see,  she seems good to me

If you really want to spend time digging deeper, look at why she borrowed the money when she is earning that kind of money. Usually its adult dependent family member needing way too much help all the time. Or some ill advised business venture. Always there is a reason. That money is going somewhere so you are right to pause and think why? Ask her. I would. why not?

Nathan Gesner · Answer

This is referred to as debt-to-income ratio or DTI.

Applicant makes $10,000 a month and wants to apply for a $2,500 rental. The rent is only 25% of their income so that's good, right? When you look at their credit report, it shows they have car loans, student loans, medical debt, and other monthly debts that add up to $5,000 a month, which is a 50% DTI. The rent is 50% of their available income, not 25%. Big difference.

You have to look at the whole picture. In your case, they have great credit and no missed payments so I would say they're managing to handle their debt and should be fine. If they could also prove stable income and good Landlord references, I wouldn't have a problem renting to them.

Marc Winter · Answer

Sounds like you are using Fannie/Freddie guidelines for tenant screening.  @Tim Herman hit it:  doesn't matter what your criteria are, so long as they are applied equally across the board.

Kenneth Garrett · Answer

@Neal Boroumand

I use DTI as one of my rental criteria.  As long as there DTI is under 45% including the rent they pass that criteria element.  My initial thought was if the mortgage companies use DTI, income, credit score and a few other factors, it makes sense for me to use a similar model.

Tenant credit report - good score + high debt?

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