Tenant Qualification: Credit Scores and Due Diligence

Posted by Monte Davis on Thursday, May 26th, 2011 at 6:39am

After discussing the need to be proactive landlords lastweek, now I'd like to turn to the topic of qualifying tenants. First, let'stalk about credit scores. This is a topic that's a little more complicatednowadays, and requires greater understanding on our part as landlords.

More previous homeowners are coming into the rentalmarketplace than ever before. These are working folks emerging fromforeclosures and short sales due to the recession. A lot of them have banged upcredit. As long as they have income in place, I don't give as much weight tothe credit score because there are just too many people in this position rightnow.

As long as I know their income is 3 times the amount of therent, I'm willing to overlook a low credit score, but I do factor in their debtto income ratio. If they have huge amounts of credit card debt, I add thatamount on to the rent in determining whether or not they can afford theproperty.

I think it's important to understand that these are solidpeople who have endured hard times. They want to get their credit back. Theywant to be homeowners again. In some cases someone with low credit or even nocredit at all might still be a good tenant if they can find a guarantor --maybe a parent or a close friend -- someone who will secure their rentalcommitment for them. The bottom line is that bad things really do happen togood people and I like to keep myself open to understanding that.

You also need to think about due diligence. Where have yourprospective tenants lived before? What do their former landlords have to sayabout them? What does their old rental look like? This is essentially justcovering your bases and making sure that if these people have been tenants before,they've been good tenants.

But due diligence is also part of being a proactive landlord-- something I can't stress enough. It's a state of mind that starts theinstant someone applies to lease the property and should carry throughout theirtenancy. The whole arrangement implies not just business, but a businessrelationship. Too often landlords and management companies tend to the businesspart of the equation and forget there are people involved.

I'd love to hear your insights and questions on tenant qualification.Please feel free to use the comments or to get in touch with my directly. Seeyou next week!

1 Response to Tenant Qualification: Credit Scores and Due Diligence

Bruce Peterson wrote:

Good advice, Monte. I'm sure some of these are good, solid people who just ran into hard times.

Posted on Thursday, June 2nd, 2011 at 4:47pm

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