Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
I have a couple applicants that are married with a newborn baby. She plans on staying home with the baby. They both have mid 700's on the smartmove application, which I think is really good. They both are college educated and would seem after talking to them, that they would be great tenants.
I'm fairly certain they will both have good rental history. They've lived together for their past 3 places. I am still going to do my do diligence and check those references. I called today, but I think it was too late and nobody picked up the phone.
However, I'm more concerned about their debt to income ratios. The woman owes 75k and the man owes 101k with 14k of that revolving; the rest student loans. The man hasn't paid his student loans in 4 months. It's not late. It just says N/A. The woman's is spotty. She has N/A for many months and then she'll pay for months.
I've had student loans before and that generally means that it was deferred or forbearance. You can get up to 5 years forbearance and I'm not sure about deferred.
He makes 3.7 times the rent gross, but from his w-2's, after taxes and other taken out, it's $2100 every other week. The rent is $1000. From what smartMove says, they're student loans, revolving and rent would be $2600. That's -$500 not counting utilities and car insurance, and whatever other bills they might have.
They pay $950 a month at their current residence.
Based on the numbers, I'm thinking no. They're a ticking time bomb. I don't have too much experience with having tenants. I just bought a duplex and am renting out the other half. Any insight into this would be much appreciated! Sorry for the long post. I wanted to make sure I got all/most of the facts in there.
Salt Lake City, UT · Member since 2016 · 199 posts · 190 votes
9y
Make sure that you are not rejecting them because they have a child. That is illegal. You should have set acceptance criteria that you follow. If they meet it and you reject them you are opening up yourself to trouble. If you can reject them based on your rental requirements you are in the clear.
Investor · Scottsdale, AZ · Member since 2017 · 237 posts · 78 votes
9y
JESTIN - Hail to you - I am a former Minnesotan, escaped after college to the desert SW. :-)
I have had SFH rentals and condos for 13 years. TWICE I rented to couples in their 20's with a baby and in both cases, one half of the couple bailed and left due to money/responsibility etc. I SWORE I would never rent to a couple in their 20's again, child or no child involved. I did it again and guess what happened? Yup - fool me 3 times and I am beyond a fool.
Now in 2 of the 3 cases, the fallout was manageable and the remaining tenant tried hard to make a go of it as long as possible, but it always ends badly and you have a quicker tenant flip than you had budgeted for. In some respects, the leftover tenant feels bad for you because you trusted them and and they let you down. In one of my cases, however, it turned into a nasty eviction because the woman took out her anger with former Bo on everyone and everything.
Now in each of my 3 cases, the couple was not married - but I DID verify how long they had been together, which was a significant amount of time in each case. I will also concede the education level of my tenants was NOT college-educated, so if your instincts are telling you they are "stand up" folks, you may be right- I am just sharing my direct experience.
MORE IMPORTANT than the age demographic for ANY rental situation, however if your 33% rule. It does not sound like your tenants are paying rent to the tune of 33% of their overall after-tax income. I did not do the exact calculation, but it sounds like they are (-$500) month? If that is the case and rent is $1000, I would be concerned. If you like them but this ratio is scary, you should NOT feel badly telling them the exact reason why you need to pass on them. However, if they can get a co-payor on the lease (parent, friend, mentor, sometimes even an employer), then I think you can sleep at night because an eviction judgment on a co-payor will end that co-payor's friendship with your tenants.
OK - just some thoughts and I am interested to hear what you end up deciding to do. On the surface, these sound like good kids who just want to become Mommy/Daddy/Family and ear big people pants but have not really done the math.
Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Jestin Sorenson I don't see where the income works, especially with a stay at home mom. Babies need a lot of stuff!!! I would move on to somebody more qualified. Summer is almost here and that's when people move the most.
If you decide to give it a go, I would at least ask for first, last and security deposit
Investor · Huntingtown, MD · Member since 2016 · 97 posts · 41 votes
9y
I would be very hesitant with that kind of student loan debt. If they're skipping payments there, what's to say they won't skip their rent eventually. Consider that if they are deferred, they are going to have to start paying on them eventually. With the rates they charge and pushing $200k, those won't be small payments once they are required to starting paying monthly.
Add to that they are new parents and probably don't yet understand the actual financial costs. Like @Kim Meredith Hampton said, babies need a LOT of stuff (I have 4...I know from experience!!). They don't realize that yet but in my opinion, this is trouble waiting to happen.
Salt Lake City, UT · Member since 2016 · 199 posts · 190 votes
9y
Make sure that you are not rejecting them because they have a child. That is illegal. You should have set acceptance criteria that you follow. If they meet it and you reject them you are opening up yourself to trouble. If you can reject them based on your rental requirements you are in the clear.
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
9y
You should have standards. Measure the application against those standards and then you rent to them or you do not rent to them. If you sit down and write out your standards, you'll never have to think about whether to approve an applicant again.
Based on what you've written here, I would deny them because their debt:income ratio is too high. I like it to be around 33% or lower though I will make exceptions up to 40% for certain situations.
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
9y
Hi Jestin,
It sounds like they actually meet your criteria (the 700 smart move) but you have an additional worry about the loans?
As a practical matter college student loan debt is a weird animal, as you have had a taste of in your own experience, many people incur it in pre-adult phase when they weren't very responsible (don't ask me how I know!) and it becomes like a chronic illness for an otherwise healthy person when they are adults.
Most folks in that situation put rent in a very different mental bucket than loans. I'd be more concerned about collecting as a loan officer than a landlord about a high DTI ratio resulting from that kind of debt. With good (and real) landlord references the loans alone wouldn't scare me much.
Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
9y
@Barry H. I appreciate the feedback. I never even thought about the young age, but it's certainly a concern as well.
@Kim Meredith Hampton I don't know much about kids as I don't have any myself, but I've heard they're expensive as well! I agree with your comment that summer is approaching. I've been getting a lot of people asking for June 1st. We'll see if we can't make it work with someone else. Thanks for your input!
@Tobey Porter I agree wholeheartedly. The debt will catch up to them at some point. So I ended up denying them and she said that the student loan debt was going to be forgiven and I asked for some documentation that it would be forgiven and she didn't say anything.
She wanted me to call her and I wish I would've just sent my denial letter, as opposed to giving her a specific reason. The denial letter is not very specific and lists a bunch of reasons why they could've been denied. They wanted their application fee back because they said I didn't tell them they would be denied if their debt to income ratio was too high, but I did give them documentation stating that they had to be financially responsible which is vague, but I don't believe they are being financially responsible. She needs to get a job or they need to live with their parents for a bit, in my opinion.
@Anthony Hurlburt Def not bc they have a child. The subject was debt to income ratio lol but a child's costs are a real thing.
@Nathan Gesner I've heard that when people live beyond their means and are miserable when they are barely making ends meet that they can make a landlords life a living hell with the complaints. A friend of mine was sued bc from a family that was struggling to get by, I'm not sure if they won or not, but there's a reason why you need to make 3x the rent. As far as whether they consider rent the same as a student loan, I'm not going to psychologically evaluate them. It's not a good fit for me and I live in the other unit. They will be right down stairs. They were going to break a lease to move into my place bc the upstairs neighbors smoke.
@Te lee I was asking for $1100 and I was going to rent it to them for $1000 bc they seemed decent and I still think they are, but high risk. They were going to move in May 1st, but didn't have 1st and deposit, so I don't think they would have had the money to do a double deposit.
Thanks to everyone who replied! Every response was considered in my decision, but summer is around the corner and there are plenty of other people looking to rent. Onwards and upwards
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
They are NOT applying for a loan and their DTI is meaningless. Use the CR reports and look for Collections, Skips, 30-60-90 lates; these are the facts of the financial responsibility.
I've never had a problem with couples + a child in 19yrs if they qualify per the above.
To be clear, I don't typically consider debt:income unless there is a reason to do so. Warning signs may be a bad credit score, a gut feeling, late rent payments with the previous Landlord, major life changes, etc. If I see a red flag, I'll dig deeper.
@Jeff B. if DTI is meaningless, why do banks use it? Studies (and personal experience) show that a high debt:income ratio increases the risk of default. It's easier to default on rent than a mortgage payment.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
9y
Last time I had an applicant where debt to income was a concern, I gave them an opportunity to step up with a guarantor (co-signer for those who prefer that term), and a deadline for doing so. They did not come to me with one.
By asking for a guarantor, you are not judging them in any way; you are letting those who would be more knowledgeable regarding their character do that judging for you. If somebody is willing to be that guarantor, then that shows that the applicant has somebody who is willing to take on some of the risk in case of a non-payment.
Of course, you then have to have some criteria for qualifying the guarantor. But with a guarantor, it gives you another way to collect if payment does not happen.
In the future it would be advisable to not give applicants a reason why they are being denied unless your state regulations require it.
Landlords are not required to give a reason beyond they did not qualify or you are still recieving applications. You reduce your liability risks by not giving specific reasons.
I normally only respond by stating that following a intensive screening process I have determined the applicant does not qualify. You do not need to spell out your screening process, it is not a applicants business to know why they did not qualify. There is no point in giving someone that is already upset any ammunition to come back at you.
Saint Paul, MN · Member since 2015 · 31 posts · 15 votes
9y
In St. Paul, MN you MUST have written criteria for denying an applicant, by law, if you accepted an application fee from them. I hope you have done this. If not you should make sure you do, and make sure that Debt-to-Income ratio standards find their way on there, based on what you take away from this thread
Minn. Stat. 504B.173 Subd. 3:
Subd. 3.Disclosures to applicant.
If a landlord accepts an applicant screening fee from a prospective tenant, the landlord must:
(1) disclose in writing prior to accepting the applicant screening fee:
(i) the name, address, and telephone number of the tenant screening service the landlord will use, unless the landlord does not use a tenant screening service; and
(ii) the criteria on which the decision to rent to the prospective tenant will be based; and
(2) notify the applicant within 14 days of rejecting a rental application, identifying the criteria the applicant failed to meet.
The remedy isn't terrible though as long as you weren't making material misrepresentations. Just a $100 fine. But still, better to not have to pay it at all. This is not legal advice. This is just a description of the law of Minnesota.
@Jeff B. if DTI is meaningless, why do banks use it? Studies (and personal experience) show that a high debt:income ratio increases the risk of default. It's easier to default on rent than a mortgage payment.
Use whatever you like. As I said, I use metrics that show me how they are behaving during the LAST 6 months.
if DTI is meaningless, why do banks use it? Studies (and personal experience) show that a high debt:income ratio increases the risk of default. It's easier to default on rent than a mortgage payment.
1) DTI is hard to calculate as even one card can have multiple rates (purchase vs cash),
2) not all cards have the same rates
3) you need the rate to calc the monthly payment due
Then too the DTI is very broad brush and spans multiple years and good tenants with action plays can take YEARS to bring down the DTI - - thus you stereotype over a misleading metric. Renters will seldom qualify for a loan which is WHY they rent.
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Jestin Sorenson You seem fairly analytical based on your analysis but it also seems as if you are flying by the seat of your pants a bit. If you haven't already you should get a hold of the MN tenant landlord handbook. I would also recommend you look for the next MMHA principles of property management course and sign up, it is very informative. If this is one of your first rentals I would also suggest you get copies of lease forms from them, they are cheap and have withstood the tests of time.
You can't consider their age when renting, that is discrimination.
You can't deny them because you don't think their relationship won't last.
You can't deny them based on debt to income if you don't have listed rental criteria with specific guidelines of what debt to income ratio you will accept.
If there is anything subjective in your rental criteria you are likely setting yourself up for a possible discrimination suit.
Renting a property is more of a science than an art, make a listing of rental criteria, if they meet the criteria, rent it to them. If they don't meet your criteria you have reason for denial. You can't take an applicant who meets your criteria and deny them based on something subjective.
TWICE I rented to couples in their 20's with a baby and in both cases, one half of the couple bailed and left due to money/responsibility etc. I SWORE I would never rent to a couple in their 20's again, child or no child involved. I did it again and guess what happened? Yup - fool me 3 times and I am beyond a fool.
Real Talk...I don't know you, and I am in a different part of the country, but the same paterns repeat themselves all over the place. Shacked up 20 somethings have proven to be the worst.
Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
9y
@Bob B. Thank you for your reply! And they did not have the security deposit.
@Jeff B. Thanks for your feedback. Looking at your earlier comment about DTI, I would disagree with the fact that just bc they are making payments on time now, doesn't mean they always will and that's the point of a credit check. The man hadn't paid his student loans in 4 months. He still had good credit, but for how long can you keep that up. The credit system won't penalize them for deferred student loan payments, but I will take them into consideration. It will affect my bottom line at some point.
With regard to a later comment. I used SmartMove and they tell you how much the monthly payment is. I don't know how accurate it is, but I would say that's it pretty accurate and if not, then they can take it up with the credit reporting agency. I'm not as concerned if they were maxed out and paying, but they are not paying and that concerns me. There's no penalty to defer student loans as far as the credit report concerns, but for me, that's a huge problem bc it will come back to bite them and I will let someone else handle the blowback.
@Steve Babiak Thanks for your input! I thought about a co-signer, but I'm not sure how hard it is to collect from them. There are a lot of rules surrounding that. Like them having to reside in the state of Minnesota for me to take any action on them. Also, when you're struggling to pay rent, sometimes they take it out on the landlord by complaining about every little thing. Case in point, they are breaking their current lease the signed March 1st to move somewhere where the apartment doesn't smell like smoke. That alone is a warning sign for me. I wouldn't have had them apply, had I known their current state, but that is the point of an application. Not everyone gets approved. I also know that I cannot deny anyone from filling out an application.
@Joseph M. Thank you for pointing out the explicit statute! I do have an application process and qualifications information sheet that I hand out to every applicant. There are many requirements, but one of them is that "the applicant must exhibit a responsible financial life. That is vague, but it's at my discretion. I haven't brought this up to my lawyer as I haven't had this issue before, but now that you mention this, I will.
@John Woodrich Thank you for your response! I would disagree with you on flying by the seat of my pants. I've been going to the REIA's here and met a guy that has 30 units, yet does less do diligence than I do and doesn't even have a system in place. I am still learning, but we all are. I have had a look at the landlord tenant handbook before, but it couldn't hurt to look at it again. I have a lease. I just had my lawyer look over. It's a very well written lease that needs some minor tweaks to conform to MN laws and statutes. I am very familiar with discrimination laws. I would never discriminate based on age or whether they have a baby or not. Joseph M. posted the law above for rental criteria. I provided everyone with the application criteria. Whether they chose to read it or not is not on me. Some criteria is a little vague, but that's to my benefit. I will have my lawyer look over my criteria to make sure it conforms to MN standards. I'm not trying to screw anyone over. If you have $200k in debt, you might want to disclose that before you fill out the app and if not, then that's what the application is for. I've read books on landlording. Brandon Turner's is one of the best in my opinion. You should check it out if you haven't already. John, I'm not sure if you have properties or not, but tenants vary on a case by case basis. One tenant didn't fill out all of the information that I needed on SmartMove and I denied her based on an incomplete app. In my mind she must be hiding something. I send everyone that is denied a letter and a list of reasons for why they might have been denied. When it comes to landlording, there are so many case by case tenants out there that it's impossible to know everything, but I have a system in place and it is working for me so far, which I think is more than I can say for the majority of landlords out there. If you're here on BP, you're one step ahead of the game already.
Thanks to everyone that has commented on this thread! I think we have a healthy discussion going that's been very informative for me, thank you!
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Jestin Sorenson your analysis is totally flawed. When analyzing DTI you don't take one applicant's gross income and the totals of their debt obligations and then speculate what their potential student loan payments are going to be. The total they owe has little to do in most cases on what their monthly payments. Smart move will tell you their monthly payments, you must by law use those payments. You can have a written policy to determine a fair and reasonable buffer for the student loans but denying them outright Because of their total debt an easy case to win on a violation of either the Equal Credit Opportunity Act or the Fair Housing Act.
You need to come up with a fair and reasonable way to deal with this situation and your current analysis is not close. Your experience with student loan repayment plans is out of date, the options have expanded greatly in the past few years http://www.ibrinfo.org/what.vp.html#IBR and even Freddie Mac & Fannie Mae recognize this http://www.fanniemae.com/portal/media/financial-ne...
It's cool to figure out your criteria and I'm glad your screening tenants, but you are making too many assumptions and frankly you are using facts that are not relevant and your assumptions are far from sound. You need to seek better advice. Based on what you have written you will not have grounds to deny them.
May I suggest that you find a reasonable criterion to estimate their future payments on these debts, and no $2,600 on 101,000 is not what people pay. It is more likely the payment would cap at $1010 and be as low as zero for up to 10 years, after which the income would be forgiven depending on the person's current income a type of employment.
I think you are likely ready to deny good tenants, but even if they are bad tenants you are for sure denying them on unsound criteria and analysis.
Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
9y
@Tim Swierczek I didn't speculate their student loan payments. It says what they are right in SmartMove. I did use THOSE numbers. I am not denying them bc of the total they owe. I'm not sure where you got that from. I merely mentioned what they owe, but that's not what I'm denying them on. I'm using one applicants income bc there is only one income from the two. I also mentioned, if you read the whole post, that based on their payment amounts from SmartMove, that they're -500 in the hole after making their student loan payments, credit card payments, and rent. Not even to mention utilities. Now if they can defer their student loans for 10 years and basically not pay anything for 10 years, then yeah that would've been fine as most of their debt is from student loans.
I will look at the student loan links you shared. Maybe the laws have changed.. She had mentioned the student loans would be forgiven, but she couldn't point me to any documentation..
Some reasons for denying them. I wasn't able to verify their income. That's reason enough right there. I didn't include that information bc it wasn't relevant to the question I was asking in this forum. They also didn't have the deposit upfront. They gave me some excuse saying that their bank was in Iowa and that they couldn't get a cashiers check. They were breaking a lease after a little more than a month to move into my place. I have more than enough reasons to deny them, but I don't want to deny quality tenants. All of the qualifications were given to them in a handout with the application. I told them to look it over and make sure before applying. I will look more into student loan debt and the rules and regulations. Thanks for replying.
Investor · St. Paul, MN · Member since 2017 · 64 posts · 8 votes
9y
The numbers aren't exact. It wouldn't let me correct them. He makes $2200 every month after taxes. The rent, credit card bills, and student loans are $2600. That's -400 not including utilities, car insurance, food, etc. SmartMove doesn't include monthly payments for student loans that are N/A. So I wasn't able to add that to the total. All of the male applicants student loans were N/A and he works, so I doubt they will be forgiven, but maybe the female applicants student loans will be forgiven in 10 years.
Nashville, TN · Member since 2015 · 83 posts · 38 votes
9y
You may need to reassess what they will actually pay in student loans. If they have standard student loans, the monthly debt payment for the student loans will likely be more like $500 - not $2600.
