“I’m sorry, you don’t qualify.”
Occasionally, none of my rental applicants will meet the financial or credit requirements needed to qualify.
When this happens, I usually have two options:
- keep looking, or
- work with the applicants I have
For me, time is money, so I usually try to work with the pool of renters that have applied.
I define “less qualified applicants” as those who have always paid their rent on time, but might have less desirable attributes such as a lower credit score, high level of debt, three dogs, or recently started a new job.
They are still viable applicants even if they are less qualified than someone with no debt and perfect credit.
I look for three traits when considering less qualified applicants:
- Responsive: They show up on time and call prior to confirm. They respond to my emails. They answer my calls.
- Available: They are available to move in when I need them to.
- Teachable: They are excited about the unit, and are willing to follow my lease rules – even if it’s “not what they are used to.”
A bird in the hand is worth two in the bush.
– John Ray, 1670
Transferring the Risk
You see, it’s all about risk mitigation. When an applicant is not qualified, I refuse to personally take on the risk myself. However, if I can transfer the risk back to the applicant or a third party, then suddenly I have less to lose if something goes wrong.
There are some specific and common steps that you can take to transfer the increased risk back to the tenant.
With that said, all of the following suggestions are considered “adverse actions,” by the FTC in which the landlord is required to send an “adverse action notice” to the applicants explaining/validating the denial OR the request for additional compensation.
1. Require a Larger Security Deposit
Check your state law limits to determine how much of a security deposit you are allowed to collect.
By collecting a deposit equal to 2-3 months worth of rent, rather than just one month, you are securing your ability to pay a few extra months of mortgage payments if your tenant abandons the lease.
In my opinion, collecting a larger deposit is the easiest way to mitigate the risk of a low-quality applicant.
2. Require Online Rent Payments
“The check is in the mail…” Yeah, right!
If anything goes wrong, such as a lack of funds, you’ll know immediately and can handle the issue quickly.
3. Require a Co-Signer
If an applicant doesn’t meet the income or credit requirements, which is common among younger tenants, you can simply require that they find a co-signer to take joint responsibility.
A co-signer is someone (often a parent or sibling) who also signs the lease and is legally obligated to pay rent if the borrower does not make payments.
Just be sure that the total income of all applicants and co-signers meets your income requirements of 2-3x the monthly rent.
4. Require a Lump Sum Payment
Recently, I accepted a tenant who only made $1,000/month, but wanted to rent a $1,625 /month apartment. He was my first applicant and I wanted to get it rented quickly.
I told him that if he paid all the rent upfront, plus a 1-month deposit, then he could have the place.
It was only a 4-month lease, and his parents were fronting the money. Sure enough, I received a check for $8,125 and he moved in a few weeks later.
When all the rent is paid upfront, the applicant instantly becomes financially qualified. It’s an easy solution to less qualified applicants on short-term leases. Just make sure your state doesn’t limit the amount of “prepaid rent” that you can collect.
5. Deny the Applicant
Bad tenants are similar to drug addictions. Once they get inside, it’s hard to get rid of them.
It’s OK to say no. There will always be another applicant.
Whenever rejecting an applicant, always give a valid business reason based on their ability to pay rent or be successful at your property.
If they don’t meet your income, credit, or reference requirements, just tell them so. Honesty is the best policy and you don’t have to allow co-signers if you don’t want to.
Remember, if you are rejecting an applicant based on their credit report, you must provide them with a copy so they have the option to dispute it with the credit bureaus.
Likewise, if you don’t allow pets, and they have a chinchilla named “Fuzzy Britches” (true story), you can legally turn them away – unless the pet is needed for a disability.
The key here is to use fair and consistent evaluation criteria with every applicant and know what is considered illegal discrimination.
If you’re in a time-crunch, try to find a way where a less-qualified applicant can offset the risk by providing additional deposit funds or some other compensation.
Some of my best tenants came from less desirable applications.
If an applicant is Responsive, Available, and Teachable, a little nurturing by the landlord will usually produce excellent long-term tenants.
These tips for handling less-qualified applicants were originally published in a more in-depth guide called “The Landlord’s Guide to Tenant Screening.”