We encourage potential tenants to discuss any application issues they may be concerned about prior to starting our screening. Regularly we have potential applicants tell us they have bad credit. They want to know if it will affect their application before investing in a full background screening. For many rental companies, the scope of their background check is limited to credit scores. Credit scores provide an objective snapshot of an applicants ability to repay what they borrow.
You may find what I am about to tell you surprising. Experience has taught me that if bad credit is the only reason a potential tenant is declined, then a lot of great tenants will be missed. Here is why you should not just dismiss an applicant because they tell you they have bad credit.
Bad Credit Rarely Predicts Future Performance
Most applicants almost immediately disclose that they have “credit issues”. The statement itself covers a plethora of sins. Just being told this is not enough to allow us to determine how it will affect their potential for approval. There is “bad credit” that can actually be acceptable for renting. There is also “bad credit” that shows a serious problem that likely could become our problem if we approve the applicant. The trick is being able to decipher the two.
Solely being guilty of bad credit issues should not be enough to dismiss an applicant. Certain credit issues are a part of many applications. The most common issue for bad credit are student loans. If we stopped approving applicants for being delinquent on a student loan, we might never approve anyone again. Student loan delinquency and default are so common that I have no doubt those programs will have to be changed some day. Often it has messed up the applicants credit score but the rest of their life is in order. When it comes to evaluating renters, I rarely seize upon student loan delinquency as an accurate predictor of future success.
Bad credit that is a result of a car repossession just a couple of months ago is a much bigger issue. The problem is that student loan and car loan defaults hit credit scores in similar manners. Unless you obtain a full report, you won’t know the true problems with an applicant’s credit score.
Some Bad Credit Is Not So Bad For Renters
A recent bankruptcy or a foreclosure are bad credit issues that often can be worked around. Back in my bank lending days, we often joked that one of the best people or entities to loan money to is a party just out of bankruptcy! The slate is clean and if you can understand what caused the bankruptcy, they might become a great customer. The exception is the applicant with multiple bankruptcies or the one who has a discharged bankruptcy and now is late on credit again.
Foreclosures used to be a bigger black mark but unfortunately have become much more common in the last ten years. Foreclosure should not be excused. Understanding why it happened, and reviewing it in relation to the rest of the credit picture, may not cause it to be a serious detriment to renting.
“Bad credit” that is much harder to accept covers a huge range of issues. The following top the list.
- Prior recent evictions
- Judgements related to past eviction
There is never an excuse for an eviction. It is probably going to hurt any application to rent. If you are willing to lose
- Tax liens should be seriously considered as the tax authorities usually have the ability to garnish wages without much warning. Any judgement presents this risk but the tax ones often seem to be a larger, more difficult number to deal with.
- Potential bankruptcy. An applicant that could file bankruptcy should be avoided. The lease could get tied up in the proceedings and there will be little you can do until the bankruptcy hearing takes place. Additional costs will be incurred to hire an attorney to make sure your interest is protected. A potential bankruptcy is hard to predict except to see a lot of debt and monthly payments, that when combined with your lease obligation, is equal to or less than the applicants income. Never forget the applicant needs to eat and pay utilities also!
A thorough screening is usually the only way to make an informed decision. Some early knowledge might save everyone some time and the applicant some money that they likely need to save. Our screening process is thorough and the cost to the applicant may be money they should hold on to. Therefore we do everything possible to pre-qualify applicants. If there is an issue that is going to come up in the screening we get it out in the open before the credit card is charged.