Minimum Standard for Credit Scores and Security Deposits

13 Replies

Hello All,

I am looking into purchasing my first investment property in a C+ / B- neighborhood in Richmond, VA. In addition to checking income, employment verification, criminal background and the tenant's rental history / evictions we wanted to set a minimum standard credit score we would allow. What have others found to be a fair value for using as your minimum required credit score on similar rentals?

Additionally, we have been discussing what would be an appropriate security deposit. We have heard this can range from $500 to a whole month's rent. We did confirm that in Virginia, the amount of a security deposit cannot exceed the cost of two months of rent. Any tips for what has worked for others here too?

Thanks in advance for your insight and perspectives!

#Richmond #Rentals #Creditscore #Securitydeposit

We get first and last plus security equal to one month. I have upped my minimums to salary 3.5x rent and credit to 640. Looking more closely at prior LL and employment type as well. So far we have had no covid problems, and we want to avoid the freeloaders as best we can. All the best.

@Theo Daubresse

Your going to be multiple answers here. I use minimum credit score of 600. You need to look at what makes up the credit score. No evictions in the last 5 years. DTI of not greater 45%. income 3x the rent. One months security deposit. I never have the security deposit the same as one months rent. I don't want them to think it's the last months rent. To move in you need one months rent plus the security deposit.

Hey @Theo Daubresse

Personally we require 1 month as the security deposit. A landlord only rents to the type of tenants they attract. I personally believe that the more "skin" the tenant has in the property the more they will take care of it. It also shows us how fiscally responsible they are. We have has resistance... but patience has lead us to attract well qualified and responsible tenants in RVA.

On the other extreme I've purchased properties from landlord who do not require a security deposit... only that they clean the mess that the previous tenant leaves behind (shake my head). Needless to say... I bought those property for a good price and they required a lot of work.

In addition to the 1 months security deposit we also require income to be 3X's rent, no exceptions. 

Carlos

@Theo Daubresse . All excellent points & advice from the above. I don't necessarily use a Credit Score Per Se. 

My base Criteria is: 

1. Do you make enough money to pay the rent? 3X Minimum.

2. Will you pay?

3. Will you pay on time?

If a person has a good reliable reason for "less than stellar" credit and "fesses up" to their situation without being questioned I may be willing to work with them. Acceptable to me are Large Medical Bills, Foreclosures From a bad housing market, Unusual Business losses, etc.

Credit report will tell you if they have numerous Late Pays or No pays (Charge-offs) then these might not be the right folks for you.

Strong Pay Stubs and verifiable good reports from previous landlords might outweigh marginal credit.   

Thanks Bjorn, Kenneth, Carlos, and Jim for the very helpful insights! It is really interesting to see the similarities for things you look for as well as the slightly different areas you focus on. Do any of you all use a common form to gather this information or tend to collect this over interviews?

We manage 100+ doors in New Jersey. We do not have a minimum credit score. Credit scores are an inexact science. Some of our best tenants are sub-prime credit (meaning under 600). I would strongly advise a deposit of 1.5 months, that's basically non-negotiable for us.

As a former renter myself and now rental property owner in an A-class area of Richmond, the standard I've personally experience is the security deposit being equal to one month's rent.



My security deposits are the same as one month's rent.

I started with credit score of 640.  But have since given up on that.  

I rented the first property to a family with a special needs kid who has unplanned/not schedulable medical issues.  Every bill they were late on was from a hospital or dr.  I get that, with special needs kids myself.  When a kid needs to go to the emergency room, you go, and pay the bill as you can figure it out.  They have been there a year, are excellent tenants.  Never more than the 5 days they are allowed to be late, and then with notification.  Often a week early.

I have rented to a lady with 4 kids who just went through a divorce.  Her credit is ruined, but her divorce settlement does say that all those bills are her husband's.  She has her payments set up on autopay and always comes one day early.

I have rented 2 apartment to young kids first moving out of mom and dad's house.  They do not have credit at all.  But they had savings accounts in the thousand of dollars.  They are all doing well.

I have also rejected people based on their credit score when it shows that they basically do not pay their debts, or they have debt of an amount that is basically their yearly income, or they seem to get a new credit card or loan every month but do not pay on their old ones.

I have primarily C+/B- properties in New Orleans.  Looking for a tenant with a decent credit score would greatly decrease my potential applicants.  I don't care so much about the actual score...it's inherently inaccurate and purposely designed to harm consumers...I look at the actual report.  Overall, as long as there is a good history of paying bills on time (doesn't even need to be perfect), that's fine with me.

Strong, verifiable income (at least 3x/rent) is more important and a substantially better indicator of tenants who will pay the rent regularly and with no issues.

Our other qualifications are no violent felonies and no court-ordered evictions within the last 10 years.  That last one is a big one for me.  It's one thing if someone runs into hard times, can't pay the rent, but voluntarily leaves.  It's quite another thing for someone to not be able to pay the rent, but won't leave either until a court makes them.  You do not want to be their next victim!

Another good indicator?  ALWAYS get a security deposit that is at least a full month's rent, plus first month's rent (of course), before move-in.  In my early days, I made an exception to that twice.  With the deal being I got half the SD before move-in and would get the second half within 30 days, after they got back the security deposit from where they were staying.

Both of those tenants turned out to be some of my worst payers!  One of them had trouble paying the rent on the second month.  They did a midnight move-out the day after rent was due only 4 months later.  The other one is still my tenant and has been for four years.  She paid $100 more toward her security on the 3rd month and nothing since.  On the bright side, she's still my tenant and eventually pays the rent.  But she has ALWAYS been a problem payer and has to be actively managed.

Because a rental is a relatively short term obligation (ie not a 30 year commitment like a house ... or even a 5 year commitment like a car wound be) I think using credit scores isn’t the best way to go.

If you think about it, people’s less than stellar credit is the reason many are renting in the first place.  So there is some counter-intuitiveness thinking that a great credit score is required to be a great renter.  It means they are more capable of being mobile (moving out to buy a house).  We rely in income verification and higher security deposits when the tenant is marginal / has issues. 

Randy 

@Theo Daubresse   We personally use a minimum credit score of 650, and have found it to be a very good indicator of who will pay their bills.  Before we implemented this minimum score, we tried or many years to not use a score and only look at the credit report for recent delinquencies (less than 24 months old).  What we found was those will low score almost always had issues with paying on time or with returned rent payments (insufficient funds).  Based on my experience, anything under 550 is nothing but trouble, unless they are young and have no established credit. 

If you are renting in C- or D areas, you will be forced to accept tenants with low credit scores, no way around it (higher quality tenants are not looking in those area very often).  But if its in a B area, then credit score is a very good way of anticipating future problems.

As for security deposit, its always one (1) months rent.  And we do not let anyone move in without fully paying the security deposit, as once they are in, it is nearly impossible to get any security department balance.

Thanks all for sharing this information! These tips and hearing about what others have done are helpful for us as we look to set the appropriate standards for our first investment property!