Moving Past a Renter’s Low Credit Score
A potential renter's low credit score doesn't have to be a deal breaker. If it's in the range considered “bad" (much lower than 600), you may want to keep searching for a more qualified tenant.
When a prospect's score is a few points below your target number, however, you might consider moving forward. That low credit score is a red flag, not a stop sign. If he or she now has a strong income, things could still work out.
Understand a "bad score"
Credit scores range from 300 to 850, and are generally classified as follows:
- 720 and up: Excellent Credit
- 690-719: Good Credit
- 630-689: Average Credit
- 300-629: Bad Credit
A score in the "bad" range reflects a habit of paying late (or not at all). Or perhaps the would-be renter is loaded with debt, making cash flow tight.
Now that you know the bad credit score range, use these five tactics to minimize your risk.
1. Ask the reason
If you have a good rapport and the prospect is willing, take the time to discuss their low credit score. Multiple factors can depress a credit score. A period of unemployment, divorce, a family member's illness or an error on a credit report can all figure into the elusive formula.
If the prospect is young, he or she may be haunted by a few bad choices made in college. Many potential renters will be aware of their low credit score and be working to raise it. It can be worth a conversation to understand the circumstances. The reasons behind the low credit score may convince you to move forward.
It's a judgment call on your end. If you decide to proceed, protect yourself and negotiate terms that protect your interests and property.
2. Raise the deposit
Once you've discussed the situation, consider how you'll move forward. If you're still interested in renting to the individual, consider offering them a lease with a higher deposit. This offers you additional protection against loss if things don't work out.
Keep in mind that many prospective renters may be strapped for cash. You might want to offer the option to pay off the extra deposit over the first few months. As a solo landlord, this is the type of flexibility you can exercise vs a larger property management company.
If you decide to charge more for the monthly rent or security deposit, ensure you stay within any rent ceilings that are in place.
3. Verify a year of pay stubs and/or savings
To make sure the tenant can pay the rent, ask to see pay stubs for the past year and invite him/her to share proof of savings. Those extra funds could be used in a pinch to pay the rent, so they offer an extra layer of security.
It's a good idea to call the prospect's human resources department and ask if employment is likely to continue. When you call references, you can also ask the prior landlord about any late payment or timing issues, and why the tenant decided to move.
4. Discuss online rent payment
To simplify rent collection, consider utilizing an online rent collection service from the tenant's bank account. This option eliminates the headaches of check writing for your tenant — and depositing checks for you. Encourage tenants to implement automatic payments to ensure funds are automatically taken out of their accounts every month.
You'll know quickly if payment issues arise, so you can head off larger problems down the road. Plus, renters have the added convenience of using a credit or debit card to avoid missing a payment or incurring a late fee.
5. Ask for a co-signer
If, after discussing the low credit score with the prospective tenant, you still aren't comfortable, you can always ask for a co-signer. This gives you another individual to contact in case the tenant has difficulty satisfying his or her lease obligation. They become responsible for the lease if your tenant fails to pay in a timely manner. And, while everyone involved hopes it won't be necessary, you'll have an additional way to collect your rent if the tenant defaults.
Just like the tenant, you should run a credit check on this individual. Make sure to review their income and bank statements, and also have them sign the lease.
When it's all said and done, renting involves common sense. When other factors are a “go," don't let a low credit score keep you from welcoming an otherwise qualified tenant.