Bad Credit - Good Tenant?

25 Replies

I could really use some cumulative life experience advice this evening! I just used the MySmartMove site for tenant screening and was greeted with a tenant score of "conditional" with a FICO of 468. I have had both great tenants and bad tenants that had bad credit, this just happens to be the first time I am doing things the "right way" rather than solely on my judgement and phone calls. Being that I have had great tenants who were in the bankruptcy camp, I am having a hard time knowing when to take a chance and when not to.

Pros: applicant has steady military income, 4x rent amount, has resided in 2 prior residences for 3 years at each in different states, prior landlords state no notices ever served, always paid on time, would rent to them again. another factor is that my current duplex tenant (great tenant) referred the applicants and they are very motivated to live next door to their friends and be in this school district for their child. Willing to pay rent via direct deposit, the accounts they do have open have high monthly payments but they are current.

Cons: Debt/Income looks to be at 39% without rent, so about 57% with rent, credit score of 468, several past accounts that were charged off with balances below 5K, appears they like to drive new cars and are willing to finance them through "finance companies" instead of traditional bank auto loans.

Trying to do my due diligence and the credit score makes me nervous, but at the same time it looks like they place priority on paying their rent and cars… no lateness in years on those, the late ones and chargeoffs look to be dept store/credit cards and things like that. I appreciate any advice or solutions that have worked for you!

Would a month-month lease provide incentive to pay on time? I've never done anything less than 12 months and I'm moving out of state soon, not sure if that makes things potentially more difficult.

Also: the prior landlords were not private small family property types, each was a large prop mgmt firm with complexes in different states, I had to give them tenant's signed release and they emailed me information, so I don't think it would be possible for the landlords to be "fake" in this instance.

I think the next step is to perhaps prod a little deeper into why the credit score is less than desirable and where they stand on being able to afford rent. Make it clear to them that you have some serious apprehensions about leasing to them - and see if you can figure out their game plan. Either that or stop wasting time on them if you think there are better applicants just around the corner.. But first of all, I think it is important to understand that there are certain reason that many people are renters and not property owners - some our too young to have much savings, others are relocated often, some just want the convenience of paying rent, others enjoy the rental apartment living in metropolitan cities, and of course there is a group of individuals out there are necessitated to rent simply because of bad credit choices.

In my particular area, people with good, established credit are typically purchasing homes and so the other camp of people are those who have less than stellar credit and are renting based solely upon the fact they cannot buy a home based upon their credit.

It becomes a difficult decision at that point requiring further investigation. One potential tenant I had with an absolutely terrible credit score as a result of Bank of America illegal foreclosing on her, another tenant had made some pretty bad automotive purchases in the past that resulted in them getting repossessed for failure to pay; however, she had never ever once missed a payment on her mortgage and just needed a place to live in the interim after selling a house.

Rarely, where I live, do you ever find the absolute perfect tenant. Perfect "tenants" just don't exist very often because those are often the same people who are just buying a house instead around here. Just some things to consider. Obviously, if credit score scares you and you think you have a good chance finding someone else, why bother and just deny the app - otherwise, if you think the person is otherwise a good candidate, perhaps you'll need to ask some more questions. The one good thing I tend to see around here is that a lot of people tend to rack up some pretty high credit card debt, buy fancy cars that end up getting repossessed, etc, but at the end of the day they often understand that they and their kids need a place to live and so typically the concept of getting evicted is far more scary than having collections call because you didn't make payments on the 60" TV.

Is there a medical debt or student debt holding down the score? These are easier to understand in my mind.

Do they owe money on goofy department store credit cards and to telecom companies? These are red flags.

I have rented to sub 500 tenants on two occasions and regretted it both times. I run B properties and can usually hold out for someone north of 575.

@Landon Elscott , @Tom V. , thanks to both of you for replying. I think the reason I am mulling this over is that I get a "feeling" that they would be good tenants. Also someone I trust said they "were good people". In the applicant's defense, he was honest and told me straight out what to expect credit wise, but I was still surprised as I had never seen a score that low. I would rather find a tenant sooner than later since we are military also and are due to move soon, but I'm trying not to let that affect my judgement. I did look over the whole report and it does appear to be a steady progression in the last 5 years to reduce the debt load, but there are a lot of chargeoffs from when applicant was younger and new to the military (less income) that haven't fallen off yet. I guess the bottom line is that rent-wise they haven't missed a beat in 8 years and are nice people that don't mind taking care of my 1/2 acre lot. He is friends with my current tenant in the other half of the duplex and I met him when I was in the yard, he happened to be over helping his friend do the yard work on my duplex. That first impression was a good one. I guess I will go over it with a clear head in the morning. thanks again for your insight!

You probably know better than I, but I have the impression that a lot of young guys enlist when they are 18 and get hit with easy credit card applications and suddenly think they should be living like free-spending grown ups. Maybe that's what happened. Terrible cycle. You could make him promise to read Dave Ramsey before he moves in (!)

Good luck!

haha @Tom V. , that's exactly what I was thinking! I know I can't but I just wanted to shake that guy and say what are you DOING?! Be nice to say we will do a 3 month lease and you have until then to read Dave, Suze, or whoever but have him do a book report on it for a 12 months lease! I used to supervise many of these types when I was in the military myself so I guess while I understand how they get sucked in to it all, I just wish they could see what they are doing to themselves. As 25 year olds they think they are entitled to drive around in new SUV's and motorcycles and are willing to pay 29% interest on their loans. Being a landlord and seeing this stuff probably explains why my poor kids have to read books like "Investing for Tweens"….

Most new landlords will look at credit scores, which do not give you a complete picture of credit. Look at evictions, income, rent history.

Joe Gore

Thanks, @Joe Gore . I have been successful about 80% of the time when faced with this tenant situation going off of gut instinct plus verifying they have always placed rent payments as a priority. I think my problem is that I vowed to start having a more "ironclad" screening process but my rental market is pretty much exclusively junior enlisted military with small family - a niche that happens to have a lot of credit issues even though the income is there. I shot off a few more questions to applicant via email about the amounts of their utilities in their present situation to make sure they can handle this one. I also need to make sure they understand the differences of an apt community and my duplex, this will be their first of that type of housing so I will have to spell out things like being responsible for changing their own lightbulbs, mowing their lawn, etc! thanks again to all who offered advice!

@Erin L. I'm in the military also here in Montgomery AL. The good thing about renting to the military is the guaranteed income. Provided he still has a few years left on his enlistment? Ask if you haven't on his plans to stay in the military. If he has at least one year left I would have him setup an allotment through MyPay to ensure the rent gets paid the same time he gets paid. Also get the contact info for his First Sergeant (a.k.a. Shirt). If you ever have any complaints you can ask the Shirt to correct it. I am positive you will get a good response. I believe being military negates the bad credit in this case. I would rent the house to him for a 12 month lease.

@Imad M. , that has generally been my experience with the military. The few bad tenants I had were the times they were not military. Our area has so much military that in 20 years I have only had 3 non-military renters. He appears to be career, and is nowhere near his high-year tenure so I know he won't be faced with being forced out due to that. I'm also lucky that I am prior military so I can tell from his uniform and command pics/medals on social media that he is a squared away guy. I think I am going to offer it to him if he can do payment via allotment. I can tell from his credit report that the idea is familiar to him, as most of his accounts are listed as "automated payment". I am learning that my "new plan" of having an iron clad screening process is always subject to other factors! I will post an update and let you know what happened.

Being able to have their kids in a desirable school district would be an incentive for them to stay current on rent. No guarantees, of course!

If he is active military he has to pay his bills...

I work with a lot of bad credit tenants.. If They have debt over 1k that they are not paying on, I generally walk away.. So like a girl who had 2k in credit card debt from 2012, and she was not paying on it.. NOPE! Now if it was a while ago that the credit was charged off I might consider them. Just recently had a guy who applied who had 12k of charged off debt from 2008. I considered him, but then another 1k showed up from 2012.. Just too much for me so we said no.

My only problem renter (1 total) was due to low income to debt ratio. A single income family. There just wasn';t enough cash to run the house and pay rent and problems happened when normal things like a speeding ticket happened. That one event threw them behind and then another typical event. I use for my renter check. It has a table of debt and green, yellow, red for pays on time or not. I'm not that interested in FICO or debt but pays on time! Then DTI, is there cash left over to cover emergencies.

Personally, I'd go with them. They have a solid, steady income, good references, know the neighbors, and a low credit score. In my book 3 out of 4 positives would outweigh the one negative. I'm one of those crazy people that think peoples character and integrity come down to more than a 3 digit number, and trust my instincts. However; just because I'd do it, doesn't mean you should.

Can I just say how happy I am that I joined BiggerPockets?! Fantastic advice, everyone, thank you. In reality, the spouse has a part-time job and has minimal income, but enough to cover household things like fuel and groceries - I didn't include the spouse in my calculations, my instinct told me to run on the long term, stable income. I will be offering them the rental later today with the stipulation that payment be via direct deposit. I believe that's how they pay their current housing so I don't expect a problem. I should mention that my social media checks also reveal stable people with no drama whatsoever. These days it seems social media can be a very revealing look into how a person deals with daily life!

@Erin L. I would take them in a heart beat. Put them on the payday rent payment plan. The day after the military pay day would be the auto debit for rent from their account. You will never have a problem. Some people are like that, pay rent and have cars but anyone else foolish enough to lend me money will get stiffed.

You need to give up on the credit score. You use the credit report to get a better picture of your applicants and their priorities but the score is not the end. Prepare your criteria around what is important to you. They pay rent and utilities. Sure if you get two at the same time and one pays all their bills and the other has issues you go with the one that takes best care of business, all other things being equal.

Unless your desperate for a tenant I wouldn't do it. I don't pay much attention to credit scores, I'm worried about the amount of debt someone carries and it sounds like he has good income but likes payments and carries a lot of debt. To much risk

@Erin L. I know this is kinda old, but how did this turn out? 

I agree with others, if the debt is older, then yes.  If the debt has been the past 3-5 years...NO!  track record is sometimes better than FICO.  Also, some big companies do not report a late paying tenant until 15 day or more, so if you need rent by the careful

Originally posted by @Erin L. :

@Landon Elscott , @Tom V. , t.... I think the reason I am mulling this over is that I get a "feeling" that they would be good tenants. Also someone I trust said they "were good people".

This thread is old but the issues raised are eternal. These landlord comments are major red flags in my view. What matters is whether they pay their bills on time or not. There is evidence that they do not. It does not matter whether they are good people if the rent is not paid on time. I saw a presentation by a collections guy once and he looked dead at the audience and said, "the best guide to future behavior is past behavior."

These are words to live by when screening tenants. What does their past behavior reveal in this case? Character is nice, but people of good character pay their bills and do not have debt charged off through non payment. 

My experience shows that rent is only paid AFTER smartphone plans and car payments.  How much are those car payments?  Can't tell you how many times I've walked past the fancy car in the driveway to serve a 3-day notice to pay or vacate.  Some car payments rival the rent amount.  Maybe you need to be their consequence!

It's been awhile since I've been on but yes - and update is in order!  We are going on 15 months of the rent paid on time, every time, even 1 day early each month!  I am out of state with the military so this has been a very good outcome.  The few texts I have gotten middle of the night/wknd scary type involving frozen pipes and a dislodged p-trap under the sink were followed up by "already fixed it" and these two families in the duplex being best friends have been helping each other out while spouses deploy, etc and aren't afraid to turn a wrench when needed.  In this particular case, this is a great living situation for them and apparently is valuable enough that they put a priority on the rent.  I probably wouldn't have done this with any other tenant - it's just that I trusted my other tenant's referral very much as we have a long history.

I know this thread is kinda old, but I needed this today. Thanks for asking such a great question and for everyone's thoughtful opinions.

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