Tenant screening, do you consider debt to income?

Question

If you want to see the monthly income of 3x the rental amount (or whatever your standards happen to be) do you ask what they owe and have monthly payments on?  Obviously if their income is already "spoken for" and they're stretched too thin they'll likely run into trouble.  I haven't previously considered this much, yet I've been burned before.  How do you handle high Debt to Income?

Kyle J. · Answer

I do.  I ask on the rental application that the applicant lists all of their financial obligations along with the name of the creditor, total amount owed, and the monthly payment amount for each.  However, I've found that less than half the time do applicants list all of that information accurately.

So I also pull their credit reports which gives me ALL of their outstanding credit accounts, along with creditor names, total amounts owed, monthly payment amounts, on-time payment histories, any amounts in collections, etc.  In my opinion, you have to take that information into consideration.

If you only look at income, then you're essentially saying there is no difference between an applicant that makes $3,000 month with no debt who is applying for a house that rents for $1,000/month; and an applicant for the same house with the same income but a $650 car payment, a $400 payment for rent to own furniture, a $350 credit card payment, another $200 credit card payment, and $150 in medical bill payments they're making for a $10,000 hospital bill that went to collections.

Both of these applicants meet the 3x income rule that most landlords use, but only one of these applicants will likely be able to actually pay the rent and the other clearly will not.  Anyway, just something to think about.

I do it because it's the smart business thing to do, but also because it's good for the applicants.  They may not see me rejecting their application as a good thing initially, but the way I look at it is, me accepting them as a tenant - knowing that mathematically they simply cannot afford the rent - is just setting them up for failure and going to result in an eviction and ultimately add to their list of debts that they owe when I go after them for past due rent and damages.  That wouldn't be doing them a service, and it certainly wouldn't be good for my business.

Kenny Dahill · Answer

Hi @Tyler Bobo, I agree with @John Underwood that it is more of a whole picture approach.

I also think it depends on the asset class you are dealing with.  Lower income are more likely to have less income and probably debt, which will hurt their DTI.

My properties are lower-middle class and I typically rent to young professionals in their 20's to mid-30's.  They might have car payments or student loans that hurt their DTI.  For them, I typically look at income, job type and then review their bank statements for anything that would be concerning.

Peter Tverdov · Answer

You can determine this via the credit report. If they have no debts (rare) then if they're making 2.75x the rent it's very similar to a bank lending on a mortgage. That's what we do. We look at their DTI, along with credit score.

John Underwood · Answer

That is a good question. Most of my tenants don't have stellar credit so they don't have many or any open credit accounts.

I usually look at the whole picture, gross income, rent, credit score etc and make a decision. This has served me well so far. Delinquent accounts show up and affect their credit score. So if they are not paying their Bill's their Credit score will be too low to qualify.

I'm interested to see what everyone else says.

Tenant screening, do you consider debt to income?

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