Low Credit Score Applicants?

[Tyler Lingle]

Hello All! I have a rental property I own & manage in Indianapolis, IN. It's been about 3 weeks on the rental market and I was vacant a long time before this briefly trying to renovate then sell it, but it did not sell over the holidays and I'm back to leasing it. I've gotten a few applicants but I'm consistently running into potential tenants with credit scores in the mid-500's. What are our thoughts on leasing to them, especially if they have 3x income to rent ratio, pay a higher deposit, and no evictions / felonies. Excited to hear what you guys think. Cheers. 

[Kevin Sobilo]

@Tyler Lingle, a VERY good question. I appreciate that you want to actually THINK about the issue. A few thoughts:

1. What is credit score supposed to tell you about an applicant? Some might say how risky they are, but many people have a low score because they may not reliably pay unsecured debts but they pay other obligations reliably. Some might say how financially stable they are. That could be true but isn't always the whole story.

I personally want to determine how financially responsible the person is. So, to me a good score is an easy YES! However, a bad score is NOT a no. A bad score to me is a reason to look further at the details and often to ask more questions. 

2. Some low scores may not be useful! I have had younger applicants who have used credit so little that a small negative like a $100 verizon phone bill in collections from when they switched carriers tanks their score. 

I can make a determination in some of these cases that the score is not indicative of their level of responsibility. 

3. Some scores are low because of unavoidable circumstances. I literally just got off the phone to accept a tenant with a lower score. This applicant is going through a divorce, almost lost a house to foreclosure (because they moved out and spouse wasn't paying mortgage), and is on disability because of a serious health issue. 

I was able to search out and verify these facts and determine the score was not reflective of their responsibility and moreso that their financial situation is DRASTICALLY improved because of insurance payouts so that this person is at this moment is now in a VERY stable financial situation with very reliable income and very ample savings. 

4. What do you do if an applicant has NO SCORE! I have had a few applicants who had no score at all. One was in his 40s and never used credit. I will accept someone with no score. I can't hold not taking on debts as a reason to flag someone as not financially responsible. In fact, someone who pays for everything they need in life without debt might be MORE responsible than the average person. 

5. You mention income 3x rent. Many people don't realize that its GROSS (before taxes) monthly income 3x rent. It is modeled after the front end ratio used to qualify people for a mortgage. 

6. I go a step further and apply a back end ratio! I use the estimated monthly debt payments from their credit report to calculate this:

(Monthly Rent + Monthly Debt Payments) / Gross Monthly Income <= 45%

Sometimes a person meets the ratio in #5, but has outsized debt obligations like child support or a $1,000 car payment this back end ratio further checks to make sure they can afford this level of rent.