Charging different rental rates based on risk .

12 Replies

Mortgage companies do this all the time , lower credit score , you pay a higher interest rate , pmi etc.   Now  lets say I advertise my house for rent on the low end with a disclaimer. " rental rate based on a credit score of 715 rental  rate increases as your score drops. "   Now I am sure everyone would apply expecting the low rate , causing some potential problems .  I was wondering how it may go over.

This is something i myself particularly wouldn't do. If there seems to be any trust issues going into the lease, i will offer the prospect the lease with additional last month's rent. So i charge security deposit, first and last month's rent.

I can see a lot of potential arguments in advertising something like that.

@Matthew Paul  That is a violation of Fair Housing laws and your states landlord/tenant laws. While you can base your decision on their credit report, you can charge different rent based on credit.
Personally, if I see the rental as risky, then I would not rent. Having an additional month or two of rent is going to do you no good, if the tenant is a PITA. I am talking from experience.

Upen Patel
Upen Patel, Lender in (#National Lender NMLS 1374243)
(571) 331-5161
Upen Patel is your comment specific to his state? I don't know of any law in my state or at the federal level that would prohibit that.
Charging different rates based on credit is done all of the time for auto insurance (most states allow 200-300% higher rates for bad credit - Alabama approved a 1800% increase for one insurer) and other businesses. However, the fair housing act doesn't allow for discrimination based on factors that correlate to race, and you may end up charging minorities higher rents, which is simply a bad business practice and look horrible to a jury. You can eliminate candidates based on credit and other race blind methods, but you are creating a potentially big problem of implementing what could be seen as a discriminatory system of rents.
Originally posted by @Matthew Paul :

Mortgage companies do this all the time , lower credit score , you pay a higher interest rate , pmi etc.   Now  lets say I advertise my house for rent on the low end with a disclaimer. " rental rate based on a credit score of 715 rental  rate increases as your score drops. "   Now I am sure everyone would apply expecting the low rate , causing some potential problems .  I was wondering how it may go over.

 Actually, I'm thinking this might be okay.  If you were clear on your criteria - such as if the score is 700 or above, the rent is this, if it's 600 -699, the rent is this.  So it's not a nebulous amount.

The reason I think this would be okay, is because you can legally deny someone based on their credit.  This is a discrimination-blind criteria in fair housing's eyes.  So, it's my opinion, that offering different rent amounts based on credit score would be legal.

Where it could get problematic, is how you base your other criteria.  You'd have to be clear on that.  For instance: absolutely no bankruptcies, evictions, criminal records, etc., will be approved.  If an applicant passes that criteria, then the only issue left is credit, and rent will be based on credit score.  And no applicants will be approved with credit scores lower than 600 for instance.

I think it could be done legally.  But, I'd advise you to set up your criteria, be really consistent in how you implement it, and think in terms of how you would respond to a fair housing complaint, just in case.

I'm pretty sure Sue Kelly's logic is correct but I'd run it by an experience landlord-tenant attorney on the chance there are local or state laws that apply and to confirm that Sue and I are correct.  However, even if it can be legally done, I believe it is a flawed concept.

I'm assuming you're going to charge market rent (or slightly below market rent) for the strongest credit scores and increase rents above market rates for the rest.  Unless your rental market is imbalanced strongly in favor of landlords (the market has more tenants available than units available), one of two things is likely to happen with the poor credit shoppers.  (1) They'll not apply or, if accepted but with an above market rent, they'll not sign a lease and look for a market rent unit or (2) they'll sign a lease knowing full well the amount of rent doesn't matter because they don't intend to pay or don't intend to pay for very long; i.e., they're deadbeats.

I wouldn't put too much emphasis on credit score. The credit reporting agencies calculate that in different ways and are not always accurate in their reporting. This could really hurt someone who otherwise might be a fine tenant. If you think they are higher risk, don't offer to rent to them or charge more security deposit instead. People's credit scores fluctuate over time. If they improve their score, will you lower the rent? I wouldn't go there.

The Fair Housing Law is not a state law but Federal Law that pertains to all states, so the answer is no you cannot do that! 

Some states say you can only charge one months rent as a Security Deposit.  Michigan says we can charge a month and a half.  In this regard you do have some leeway in what you ask for a SD.  However, charge the maximum you can on your SD and follow the law and you will be fine.  

Screen your tenants well and make sure they are COLLECTIBLE!

Nancy Neville

I look at credit scores but more important to me is any eviction history and criminal history. I have one excellent tenant with a <500 credit score. We just signed a new lease for another year. Credit score is no indication whether your tenant will be high maintenance, a real pain in the artery:), give you any guarantee of how they will treat your property,  or any guarantee they won't "go bad". At some point, people with evictions or criminal histories had none on their records. I don't see a benefit in changing rental rates for credit scores. If your property is worth $1000 a month, would you forfeit $100 a month for someone with a 800+ score?

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

I was looking at it set the rent at  $ 1200 , if you have a 700 plus score $ 1150  a 650 to 700 score  $1175   below 650   $ 1200   . I havent offered it  just working it thru .

Even if you were able to engineer it to be legal (which will be tough), you are asking for a lawsuit. Think of it like crossing the street at a crosswalk. Cars are supposed to stop, but if they don't and hit you, you may be legally right, but also may be dead. Avoid the potential for a discrimination lawsuit.

Max Kim Disparate impact is an interesting topic. There was a recent Supreme Court case this June on it. I don't want to appear to be giving legal advice, so will refrain from commenting on the topic. Here's a decent summary of the recent Scotus decision. http://www.scotusblog.com/2015/06/paul-hancock-fha/.

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