6 Ways to Handle Applicants with Bad Credit

Written on December 17, 2015 by , updated on October 23, 2018

Bad CreditThe advantage individual landlords have over big management companies is that we can be more flexible with our terms than they can.

We can and often do treat each tenant on an individual basis, not just by what some numbers on a credit report show.

Of course, a credit score that you can get through Cozy is a great indicator of whether a person is a good or a bad credit risk. A low score, usually 629 and below, often means this person doesn’t pay their bills, or if they do, they don’t pay them on time.

A low score could also mean a person carries too much debt, and if that happens with one of your tenants, good luck getting rent payments. So basing your decision on a person’s credit score makes sense.

But it also makes sense to waive that rule in some cases.


What is a Bad Credit Score?

A bad credit score automatically disqualifies tenants from renting a place from many of the large rental property companies. Buy how do you know what is “bad”?

The credit scale is between 300 and 850, and the general industry follows these guidelines:

  • 300-629: Bad credit
  • 630-689: Average credit
  • 690-719: Good credit
  • 720 and up: Excellent credit

But individual landlords are free to waive their credit score benchmark, and they often do if there are extenuating circumstances – as long as they treat all applicants by the same standards. This flexibility gives individual landlords a way to compete with the huge companies that offer thousands of rental properties. So if you haven’t considered this option, you might want to.

Here are six ways to minimize your risk if you rent to someone with a bad credit score:

1. Find Out the Reason for the Bad Score

A prospective tenant might tell you before you even run a credit check that they have a bad credit score. Or you might not find this out until after you run the credit check. Either way, instead of just dismissing this person, ask them the reason for the low credit score.

Maybe this person has a short sale or a foreclosure on their record, which substantially lowers a credit score. Or maybe they were running a business that went under and got into debt because of it. Maybe they were a victim of identity theft. Maybe their credit report contains an error they’re unaware of. There are many reasons potentially good tenants might have a bad credit score.

2. Ask to See Pay Stubs

If there’s a good reason for the low credit score, look at this person’s income. If they’ve been on the job for a year or more with a decent income, you might want to consider this person. Note that people should ideally spend no more than 30 to 35 percent of their income on rent. Ask to see their pay stubs for the past year that prove their income. Also call the person’s employer. Here’s an example of what to say:

I’m calling to verify the employment of a potential tenant. Is there someone I can speak with?

Then, when the right person comes on the line, ask the following questions:

  1. How long has X been employed with you?
  2. What position does he (or she) hold there?
  3. What is the likelihood of continued employment?

If everything checks out on the employment front, there are more things you can do.

3. Ask for Rent Receipts

If the potential tenant is renting a place now, ask to see proof of rent payments. You want to know whether this person has been paying rent every month, ideally for the past year, and whether they pay on time. Call the current landlord to find out whether this person has been a good tenant. If possible, call the prior landlord, too. Ask the following:

  1. Did they pay the rent on time?
  2. Did they leave the property in good condition?
  3. Why did they move?

If the potential tenant doesn’t shine here, and maybe was even evicted before, you should probably not consider this person and keep looking. Paying the rent every month on time is your main concern. If a potential tenant can’t prove that they’ve ever done that, combined with the bad credit score, it typically makes them too much of a risk for you to consider.

But if they have a good income and proof that they pay rent on time, this tenant is starting to look pretty good, despite the bad credit score.

4. Ask to See Proof of Funds

By checking a potential tenant’s bank statements, you can determine whether they have enough cash in reserves to pay rent. Just looking at how much income they take in doesn’t give you a complete picture. But knowing that they have money set aside is another way you can determine whether they can afford to pay the rent.

5. Charge a Tenant with Bad Credit More

People with bad credit pay a higher interest rate when they take out a loan or a credit card. The reason they pay more is that the odds of them defaulting are greater than that of people with good credit.

So if you normally charge first month’s rent and security deposit to tenants that pass your credit check, you could charge tenants that don’t pass your credit check two month’s rent plus security. Or you could charge more per month for the rent or ask for a higher security deposit.

Charging high-risk tenants more is no different from what any other lender does. Plus, if this person has been repeatedly turned down for a rental unit because of their credit score, they will probably be grateful to finally get a place and will willingly pay a premium for it.

Note: If you choose to charge more for the security deposit or rent, make sure that you stay within any rent ceilings that might be in place for your jurisdiction.

6. Ask for a Co-signer

Having a person with good credit co-sign the lease gives you another avenue to collect rent if your tenant doesn’t pay. You would run a credit check on the co-signer just as you do for tenants. Check the co-signer’s income and bank statements, and have the co-signer sign the lease as well.

Some landlords go strictly by the guidelines they set up, and some landlords are more flexible. If you haven’t considered renting to people with a low credit score, you might want to.

Let us know if you’ve done this and your experience in the comment section!

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