My first property is in escrow and I'm trying to get ready to evaluate applicants. I want to have a full set of standards before I start evaluating applicants that way I can prove I used the same qualifications for everyone. Whats you're credit score drop off for applicants? I realize that the higher the rent the higher the drop off should be. The property in question will rent for $1000 which is a little less than the local average.
Ignore the FICO score, look at the full story told by the credit report. We're forced to use FICO scores as lenders because we have a zillion people and just need a set standard. As a result we say "yes!" to people with 760 FICO scores who immediately go into default and should never have gotten that loan to begin with, and we say "no" to people with 579 FICO scores due to an unforeseen (and unforeseeable) medical issue but with otherwise perfect credit.
For example it often appears that civil judgements in default do not impact FICO score the way one might think they "should." So you have these folks with 760 FICO scores who are perfectly happy to ignore the orders of a judge, or who are perpetually unable to pay their entirely predictable income taxes year after year after year & have to continually make payment arrangements because their payment is always late.
And then you have folks with low FICO scores who, like I indicated above, just got sick, and got right with all the unexpected expenses and bills over the course of three months, but those late payments do not drop off for 5-10 years.
We're handcuffed into giving out those irresponsible loans, and denying those completely responsible loans, but you as an individual landlord have the freedom to exercise wisdom and discretion that we do not. Use that. Read the story (& if it corroborates with what they say), not the FICO score. Let someone else rent to that tenant applicant with the great FICO score that can't pay their bills on time & ignores the authority of a judge, and be open to that tenant so grateful that you're looking past their FICO score that they will be a rockstar tenant.
Hi Thomas,
For rentals, I wouldn't exactly expect a higher credit score qualification for a higher rental price. I look at income and debt to income ratio for that to see if they can afford the rent based off of the other payments they're making. For example, a qualification could be income must be 3X the monthly rent (gross income).
For credit score, our recommendation is above 560 for an approval, but I do not think there is a magic number. Stick to a number you are comfortable with and would be confident about when approving a tenant.
Also, you can do other things to screen your tenant and set qualifications for. Background checks, eviction reports, and calling previous landlords and employment can assist with this.
Good luck!
@Lee Ripma and @Jenifer Kynor very useful information!
2.5x (don't got below that), 550 score or more, no evictions in 5 years, and no crimal history. We like to stay in the 3x with 600+, but the other numbers are our dead drop offs. Good luck!
Ignore the FICO score, look at the full story told by the credit report. We're forced to use FICO scores as lenders because we have a zillion people and just need a set standard. As a result we say "yes!" to people with 760 FICO scores who immediately go into default and should never have gotten that loan to begin with, and we say "no" to people with 579 FICO scores due to an unforeseen (and unforeseeable) medical issue but with otherwise perfect credit.
For example it often appears that civil judgements in default do not impact FICO score the way one might think they "should." So you have these folks with 760 FICO scores who are perfectly happy to ignore the orders of a judge, or who are perpetually unable to pay their entirely predictable income taxes year after year after year & have to continually make payment arrangements because their payment is always late.
And then you have folks with low FICO scores who, like I indicated above, just got sick, and got right with all the unexpected expenses and bills over the course of three months, but those late payments do not drop off for 5-10 years.
We're handcuffed into giving out those irresponsible loans, and denying those completely responsible loans, but you as an individual landlord have the freedom to exercise wisdom and discretion that we do not. Use that. Read the story (& if it corroborates with what they say), not the FICO score. Let someone else rent to that tenant applicant with the great FICO score that can't pay their bills on time & ignores the authority of a judge, and be open to that tenant so grateful that you're looking past their FICO score that they will be a rockstar tenant.
@Lee Ripma Lee, what does it mean to add you as "additional insured, in case they trash the place" and how would you leverage it in a practical scenario? Thanks for teaching me something.
My biz partner is a lawyer, so he's hip to these kinds of things. Basically, if they were to trash the place beyond the deposit (very possible) then we could submit a claim to their renter's insurance company and get our damages covered. This is more of his wheelhouse than mine but we just require that they list us as additional insured parties on the policy.
My biz partner is a lawyer, so he's hip to these kinds of things. Basically, if they were to trash the place beyond the deposit (very possible) then we could submit a claim to their renter's insurance company and get our damages covered. This is more of his wheelhouse than mine but we just require that they list us as additional insured parties on the policy.
Expand on that if you could. I've never heard of anyone getting renters insurance that covers the renter damaging the property. What specific coverages are you all requiring, and have you used it and gotten the tenants insurance company to pay it?
@Levi T. It is my understanding (from a close friend insurance agent) that the "additional" insured is like a co-insured in that you are notified when a policy is cancelled, or not paid. This allows the landlord to ensure that the renter complies with the lease requirement to maintain renter's insurance.
@Mike Scott-Smith @Lee Ripma I am specifically referring to the damage part of it, as in beyound normal wear and tear after the security deposit. I already know about the additional insured that's fairly standard.. We require tenants to have tenant insurance as well as liability insurance due to damages from neglect, like a busted pipe and they don't turn off the water, but I've never heard of anyone using it for damages after move out for items beyound normal wear and tear.. if that's possible, I'd like to learn more about that part.
@Levi T. A renter's policy does not cover property damage. It only covers the renter's property, and has coverage for liability for injury (dog bites, falls etc...). Your home owner's policy would cover the damage after deductible.
That's not true, "Personal liability renters insurance policies may cover bodily injury and property damage to others caused by your actions or negligence." - Nationwide
If the renters insurance does not have the liability component, then yes it only covers their belonging, however if it does have a liability component, then it does cover other damages where the insured is found guilty or liability of damages, such as a fire, or water damage.
Once again, what I'm asking is; has anyone successfully used this process to recover damages beyond normal wear and tear on move-out of a tenant, as Lee Ripma had claimed, and if they did, what was that process?
Our company, which owns and manages hundreds of units, require all tenants to carry renters insurance, and $300k in liability... And yes we are named as the additional insured. If we could use case law to collect damages from insurance companies on renter insurance for items found by a judge to be beyond normal wear and tear, that'd be a huge win in terms of turnover cost.
Although I review the entire report to determine the reason for a applicants credit score I still have a cut off point. The credit score/report when analysed gives a solid assessment of a applicants history pertaining to their delinquency rate. In light of the fact that the landlord is likely the first in line to not be paid it is important to understand how this delinquency rate relates to the score. The credit score is a value derived directly from the individuals payment history. The score is basically a Coles Notes summery of the report in statistical terms.
My cut off is 650. Above that score, up to 699 statistics show a 12% chance of delinquency. Below 650 down to 600 the delinquency rate rises to 23% which is too much risk in my opinion. Below 600 there is a 40% chance of delinquency. At that point you are basically rolling the dice and waiting till the rent stops coming.
@Levi T. I just reviewed Nationwide's website....nowhere do I see what you are talking about. If your renter's can obtain a policy that covers damage good on them. I have not found that in any research, nor have I gotten that info from insurance agents. The ONLY logical explanation is state-by-state laws.
https://www.biggerpockets.com/forums/95/topics/115140-tenant-renters-insurance-can-i-file-a-claim-for-damages-if-tenant-does-damage
@Levi T. I just reviewed Nationwide's website....nowhere do I see what you are talking about. If your renter's can obtain a policy that covers damage good on them. I have not found that in any research, nor have I gotten that info from insurance agents. The ONLY logical explanation is state-by-state laws.
You now owe me a $1 for Googling that for you....Call your insurance buddy and he will give you the lowdown on tenant liability insurance that is offered with ALL rental insurance programs by ALL decent insurance companies. This is a universal standard for most providers, it's just up to you as a LL to require it or not in the coverage, which you should be doing. https://www.nationwide.com/renters-insurance-cover...
The question once again comes down to the process of collecting on damages beyond normal wear and tear. I would assume one would file a claim with the tenants insurance company and present them the documents, or could one just go right to court and get the judgement, then file the claim with the insurance company so one does not have to argue with them about it.
@Levi T. This is a great debate. Easy research would tell you that such liability "MAY" cover a renter if their dog bites someone or similar. Such as the person bitten may be able to get a new pair of jeans because the dog tore them when biting. I would not recommend you assume based on the item you highlighted, seems very very vague with "MAY". Good luck.
My biz partner is a lawyer, so he's hip to these kinds of things. Basically, if they were to trash the place beyond the deposit (very possible) then we could submit a claim to their renter's insurance company and get our damages covered. This is more of his wheelhouse than mine but we just require that they list us as additional insured parties on the policy.
Expand on that if you could. I've never heard of anyone getting renters insurance that covers the renter damaging the property. What specific coverages are you all requiring, and have you used it and gotten the tenants insurance company to pay it?
A party of interest or interested party means that if there are any changes in the insurance, you will be notified. For example, when you finance a car, the bank that issued the loan, will in most cases, require the insurance company to list the bank as the "party of interest." This means that if the insurance is lowered, or changed, or cancelled outside of the limits of the lien contract, they can put "force placed" insurance which is considerably more pricey than the driver maintaining their own insurance.
**This does not protect you by being able to file a claim if they trash the place beyond what the deposit will cover** It is in place to notify the owner of the rental if the tenant stopped or altered the renters insurance so the owner can take corrective action.
And just because you are listed as a party of interest does not mean the insurance company won't drop the ball and forget to notify you. I have seen this happen many, many times working in retail finance.
I do not know if residential rental agreements can include clauses for forced placed insurance, but I am going to investigate because I'm now curious.
Hi Thomas,
I have signed roughly 15,000 retail loans over my 10-year career in retail finance, and I will tell you there are many things you need to look for in addition to a credit score.
The three basic things you want to look at with regard to creditworthiness are:
1. Ability (Debt:Income ratio)
A good rule of thumb is that you want the rental price to be less than 30% of their gross income and the lower, the better. Their overall debt (including the new rent) should be less than 50% of their gross monthly income.
2. Stability (Time on job, time at last residence, age of trade lines in credit report)
These are fairly self-explanatory - the more time at one job, the longer time at a previous residence, and the older (positive) credit lines they have shows a much more complete and accurate picture if they will be able to fulfill the lease terms. I would shoot for at least 2-years at their current job, 2-years at their previous residence, and at least one positive trade line on their credit report that is over 5-years old. A trade line on a credit report is something like a credit card (R-revolving debt) or car/furniture loan (I-Installment debt). There are others, but nothing worth getting into for this purpose.
3. Willingness to Repay
This is looking at their payment history and their trade lines in their credit report. Look for the dates opened, and make sure they have ontime payments without a lot of slow pays (30/60/90 days late). Look for their biggest credit lines and compare to their previous rent. It would also be a good idea to get their payment history from their previous landlord (you will have to check if that's okay in CA, idk).
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A credit report is a snapshot into a person's financial life, but a score is not a good indicator for creditworthiness. I have done loans for millionaires with 500 credit-scores, and I have done loans for 18-year olds with 800 FICO scores. If you livelihood is dependant on your rental income, it would probably be a good idea to get a professional to look over your potential tenants until you know what you're doing. They will not only go over a their credit but also their criminal history and judgement history.
@Tom R. Assuming the property is in a decent area I would set a 600 minimum credit score to pass along to tenant candidates. Make sure to stress or just mention that your screening criteria are minimum requirements.
The mistake a lot of landlords make is they make it sound like if people hit the minimums that the applicants will be approved. You set yourself up for people to be really pissed at you if they feel like they were strung along.
Outside of the raw credit score it is definitely worth learning how to interpret the credit reports rather than just going by the raw score. Gives you more insight on why their credit is low.
I don't care about FICO. If they are renting, they most likely have poor credit. At a 1000 a month they could afford a pretty nice place at $500 / 100,000 borrowed.
I do care about:
Work history - I call the employer to verify income and tenure of employment
income 3x rent.
evictions
criminal - big offenses - sex offender, robbery, etc. smaller offenses years ago, I am not bothered.
I prefer candidates with good credit (over 600 minimum), no evictions or judgments, clear criminal background checks, equivalent of 3x income, etc. However, to protect myself, I include on the application a section where they can provide exceptions they would like considered to my typical requirements and let them know that I do analyze it. For instance, someone who just went through a divorce may not have stellar credit still may be a good candidate if income exceeds requirements or they have a cosigner.
As far as insurance, I've looked into it, and there is a type of insurance out there that will pay for tenant damage so you can potentially offer low security deposit options, but it is only available to large projects, not small guys like me. There is also some dispute over "additional interest" and "additional insured" confusing enough where I'm never sure which way to go. Apparently, additional insured may limit you from collecting against the tenant as you are also insured on the policy where additional interest notifies you if they cancel or change their policy. From speaking with my insurer, it's my understanding that this renter's liability is for other damage, like a guest slip and fall or their dog bites someone, not paying for damage they've caused to your unit.
I'm not aware of any renter's insurance that would cover damage to the property itself - most policies cover the tenant's belongings and may include liability coverage if the tenant negligently injures someone on the property, for example.
If there are renter's policies that cover damage to the apartment itself, I'd love to know about them!
One solution I have seen is that instead of a security deposit, the tenant purchases a surety bond to cover potential damage. I like the idea because it reduces the cost to the tenant and is an immediate non-refundable payment to the landlord.
Depending on your class of property, IMO it should vary!
When we screen the first and most important is income, do they make 3x? We always prefer if it's 4-6x+ higher, and also prefer dual income households for that reason, although it always boils down to best candidates. Next, we look at job history-- how long have they been there, is their work stable and nearby? We require at least 6-months job history, but prefer it to be 2-5+ years. Income is what will pay rent, not FICO score. Also, look at their moving history, if they move a lot, it's likely because they are getting kicked out, and hence not easy to work with. If all that passes, then we look at their FICO report-- how much in monthly fixed expenses, and IMO the biggest-- when were they last late on a bill? You gotta look at the entire picture of a person, that's why screening IMO can't just be done by a computer. Do all your homework with people, and look at their lifestyle-- do they come in with a Mercedes (I've seen this, renting out a $675/mo 2bd apt, potential tenant comes in with a $50K car-- Giant red flag, giant loan payment!), or are they living within their means?
I always suggest offering a discount if they pay by the 1st of the month, it's easier for you because they will likely pay then, and easier for them because they are getting a better value. It's a win/win!