Investor · Ridgecrest, CA · Member since 2017 · 247 posts · 120 votes
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.
@Tom R. credit score is not as important as what is on the report.
Look at it this way. To qualify for 3.5% down on an FHA loan only requires a credit score of 580. To get an FHA loan in general only requires a score of 500.
I know this is off topic, but while it's technically possible to get an FHA loan with a score of 500, I've never heard of a lender that will do it. If a borrower has a score under 600, they most likely have other issues that prevent an FHA loan from being approved: recent bankruptcy, significant derogatories, consistent late payments, etc.
FICO doesn't pay your rent, so the major thing is the tenants income.
1. No evictions - ever.
2. Income is 3 to 4 rents depending on credit: bad credit or no credit - 4 rents gross income.
3. Credit report is still analyzed for red flags: if they've got collection for $60 from pizza (true story) it's much worse than if they filed bankruptcy after getting medical bill after a surgery.
I don't mind that we've got off topic I'm learning a lot. I've got a whole list of things that would disqualify a renter but I also want to a little flexible I understand that people make mistakes and they may or may not learn from them. I wouldn't have rented a house to myself 5 years ago
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.
Are you currently doing this or planning to? If you are doing this, what class of properties do you rent? Are they apartments? Are they single family houses? This is common practice in my non-real estate busness where as a renter of equipment I am required to to list the supplier as an additional insured/loss payee. The amount is limited to the cost of the rented equipment. I'd love to know how much you are covered for especially if a tenant damages more than their own unit i.e. a bathtub on the second floor overflows to the first? I also suspect that this may not be legal in some places. It would be great if you and/or your partner would chime in or start a new thread on the topic. I think many would find it interesting.
I typically reject any applicants with less than 600 credit score, unless it's from medical or student loan debt and it shows other bills that they do pay on time. The divorce excuse is no good, but I hear it all the time. Also, any collections from previous landlords is an automatic rejection no matter what the score.
For my studio apartments I would accept a person who is just starting out and doesn't have a score yet if their employment history and attitude are good. I would rather take a chance on a young person with no credit score than give a second chance to an older person who should have known better.
The biggest value in the credit report is to confirm previous addresses so you know they aren't leaving out an address where they'll get a bad reference. I have caught them in this numerous times. The addresses on the reports must match the addresses on the application. This is why I don't use a screening service that would just give a FICO score.
@Amy A. Love the addition of "I would rather take a chance on a young person with no credit score than give a second chance to an older person who should have known better." Never thought of it like this. Something to keep in mind for all investors.
@Amy A. Love the addition of "I would rather take a chance on a young person with no credit score than give a second chance to an older person who should have known better." Never thought of it like this. Something to keep in mind for all investors.
I do the same just because I build better relationship with younger tenants, however, the seasoned landlords do just the opposite: they don't want younger tenants (even with good credit) because of their transition life style - the older people even with low credit score is much better. Bankruptcy is the favorite thing - these tenants going to live long enough and pay because all the credit minded landlords won't take them.
It makes me happy to read comments like these - I have very good pool of tenants who are discriminated against by credit minded landlords.
I know a case when an agent set up as a criteria 640 FICO and properties were vacant for 7 months. Agent doesn't lose money - he still was charging management feees because the properties need to be checked in regularly (gas, water, electric etc), but the investors lost thousands in taxes and HOA fees.
If you're renting for $750-950/mo, there is a good chance people don't have any decent credit - or they'd buy otherwise.
For $1400 rent there is a different story: people might be relocating because of work and might not be renters because of lack of credit. For cheaper properties - it's 99% of tenants with bad credit.
"I would rather take a chance on a young person with no credit score than give a second chance to an older person"
Why would you feel the need to put your business at risk by renting to either one. Choosing one over the other suggests you operate a very high risk business with less than adequate screening standards. If the purpose of screening is to eliminate risk, since both candidates indicate a high level of risk, accepting either indicates your screening standards are very low.
@Thomas s. My criteria is actually very high, except for a few small apartments that are difficult to rent. They are cheap enough that I get a lot of 19 year olds who are just starting out. Those with better credit want bigger apartments in nicer areas.
I followed up with my partner on this and no, you can't recover damages with renters insurance. The function is to protect you from liability caused by them. For example, a friend of your tenant trips on an electrical cord that is in the rental and gets a head injury. An attorney recovering damages would have to go to the renters insurance policy first. Same with a dog bite. If your renter burned the place down then their renters insurance would pay for the deductible. So I misunderstood the function of the renters insurance when I thought it could cover damages to the unit.
I followed up with my partner on this and no, you can't recover damages with renters insurance. The function is to protect you from liability caused by them. For example, a friend of your tenant trips on an electrical cord that is in the rental and gets a head injury. An attorney recovering damages would have to go to the renters insurance policy first. Same with a dog bite. If your renter burned the place down then their renters insurance would pay for the deductible. So I misunderstood the function of the renters insurance when I thought it could cover damages to the unit.