6 Things To Consider When Renting to Tenants With Bad Credit
Screening tenants, especially their financial situation, is the most critical part of operating a rental property. To make sure tenants can pay their rent on time each month, you should run an employment and credit check. Then, you might have to decide whether you're open to renting to tenants with bad credit.
As a rental property owner, you expect tenants to pay their rent on time each month. Even if a tenant doesn't have a stellar credit score, that doesn't necessarily mean you shouldn't rent to them, particularly if other aspects of their application are a good fit. Here are a few things to remember when renting to tenants with bad credit.
Do I have to rent to someone with bad credit?
It's up to property owners to pick their tenants. So, you may want to require tenants have a minimum credit score. In many ways, a good credit score signals that an individual is creditworthy and financially responsible, which likely means they can afford to pay rent. However, you might not want to completely avoid renting to a tenant with bad credit.
People have bad credit for many reasons. It doesn't always mean they haven't paid their bills in the past or that they're irresponsible with money. If the renter applicant otherwise looks perfectly suited for your home, you can require a higher deposit or a co-signer to compensate for the poor credit score.
Do most landlords do credit checks?
As part of the tenant screening process, it's essential to run a credit check. The reports offer a glimpse into the individual's financial history, including their bill-paying past and whether there are any financial judgments against them.
If someone has a good credit history, they'll likely consistently pay their rent on time. If someone has a history of late or missed payments, this behavior may continue. In these cases, property owners should dig a little deeper before renting to tenants with bad credit.
What is the lowest credit score to rent a house?
Credit scores range from 300 to 850, according to the credit bureau Experian. Here's what's considered a good and bad credit score:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
It's up to you to decide the minimum credit score that's acceptable to you. But many landlords set 600 as the lowest score to rent a house.
Things to remember when renting to tenants with bad credit
Even if an applicant has a negative credit score, that doesn't always mean you shouldn't rent to them. Here are some things to remember when renting to tenants with bad credit:
1. Understand the reason for the bad credit score
Credit scores come from various factors, including payment history, account balances, length of credit, types of credit accounts and recent activity on these accounts. But, many different things affect these elements.
For example, if someone is a recent graduate or just moving out on their own, they likely haven't built up a solid credit history, which could show up on their credit report as a low score. Financial changes from getting a divorce, incurring large medical bills or being a victim of identity theft can also ding someone's credit.
Communicating with the applicant about why their credit score is low is crucial. It will help you understand their situation and build a trusting relationship. The more information you have, the more informed decision you can make.
2. Get proof of income
The screening process should include verifying the applicant's income. If someone has a steady job with a decent salary, it could overshadow their poor credit score and set your mind at ease about their ability to pay rent.
Ask for pay stubs and contact information for their employer to find out how long the person has worked there and to verify their salary. Make sure their income is at least three times the monthly rent to ensure they can afford it.
3. Check rental history
An applicant's behavior with previous landlords are a telling sign of how they'll be with you. If the individual is renting somewhere else, ask for rent receipts showing that they've paid on time each month.
Contact previous landlords, as well, to learn more about their rental history. Find out what type of tenant they were, whether they followed the lease, paid rent on time and if they got evicted. If past landlords don't have good things to say, it's a good idea to move on to another renter.
4. Charge a higher deposit
Banks often charge people with lower credit scores a higher interest rate to protect themselves against the risk. So, you might want to consider doing something similar.
Increasing the deposit amount could lower your risk of tenants defaulting on their rent payments. If your typical deposit is one month's rent and a security deposit, increase it to two months' rent and a security deposit. Make sure whatever you charge aligns with local landlord-tenant laws, which may set caps on security deposits or other fees.
5. Require a co-signer or guarantor
Another option for renting to tenants with bad credit is to ask them to have someone with good credit to co-sign or act as a guarantor on their lease. If you're not sure of the difference between a co-signer and guarantor, here's an overview:
- A guarantor is usually a family member or friend who agrees to take on the responsibility of paying rent or covering property damage if the tenant can't. Guarantors sign the lease but usually don't live in the home.
- A co-signer is often a roommate and signs the lease with the right to occupy the home. The co-signer agrees to share the responsibility for the rent, fees and damage. They may contribute to the monthly rent and are responsible for paying when the tenant can't.
If you allow a co-signer or guarantor, you'll need to check that person's credit history and proof of income, as well.
6. Use a shorter lease
The term for most rental lease agreements is one year. Offering a shorter lease term, such as three or six months, is an option for renting to tenants with bad credit. A shorter lease gives the tenant the opportunity to prove they can pay rent on time and protects you in case they can't by ending the tenancy within a short timeframe.
If everything works out after the shortened lease ends, you can ask the renter to sign a year-long lease.
Renting to tenants with bad credit
Renting to tenants with bad credit is risky. You're not sure of their financial situation and whether they'll pay rent. But automatically discounting these tenants because of their poor credit might be a mistake.
If the individual meets all your other requirements and seems like a good fit, consider charging a higher deposit or relying more on proof of income. The tenant will appreciate your willingness to work with them since renting a home with bad credit is challenging.