Should You Accept Applicants With Shaky Financial Histories?
A really nice tenant applied for your rental, but you’re on the fence. You like this person; in fact, you and this applicant have mutual friends and they vouched for the applicant’s warmth, courtesy and friendliness. The personal references checked out, you confirmed employment, and you reviewed recent paystubs.
But this applicant has had financial problems. Serious problems. Bankruptcy, a low credit score and even a prior eviction came up on the background check you ordered. The applicant was completely straightforward about the past, telling you in advance about an unfortunate divorce, a lengthy illness, and other unexpected setbacks that would appear on the background check.
The person doesn’t meet your applicant criteria, but something is stopping you from rejecting their application. You find yourself thinking about that person, and asking yourself how you’d feel if you were an applicant in their situation.
What should you do? Fortunately, there are great guidelines for making decisions like these. Check out these tips, and see if they help you find the answer you need.
What are your screening criteria?
Income property can’t be managed successfully on hunches. You will never know for sure whether an applicant is qualified if you haven’t set criteria for accepting applications. Decide, in advance, how much income your tenant will need, among other benchmarks. Here are common criteria for tenant applicants:
- Adequate income: Typically, their monthly income should be at least three times the rent.
- Pets: Yes or no? Decide in advance. (Service animals are not considered pets.)
- Number of potential residents: How many people can comfortably live in your rental?
- Credit history: Do applicants have a record of paying bills on time?
- Criminal history: Has an applicant been convicted of crimes? Which crimes? (Some states have strict rules on this question.)
- Eviction record: Has an applicant been evicted for nonpayment or other lease violations?
Having these requirements removes much of the guesswork from accepting a tenant application. However, no single list can guarantee that a tenant will always pay rent on time and always follow lease rules. There are areas that require extra thought.
For example, an applicant may meet all of your criteria, but may be late for appointments, fail to return calls, or behave in other unprofessional ways. That’s when a landlord does a gut check. For a first-time landlord, the gut check is challenging. There is no history with other tenants to fall back on. If this is the case, ask other landlords. If you don’t know any, find a local landlord or property manager association.
The big decision
Okay, so you’re armed with all the information you need to make a decision about whether or not to accept a tenant applicant. You have the full background report, you’ve interviewed former landlords, and you’ve met three times with the applicant.
Still, you don’t know what to do. Your gut check is leaning toward acceptance, but you’re worried about being burned.
Well, it’s time to crunch some numbers. Can you afford it if the new tenant misses a rent payment? What if the tenant misses two payments? What, exactly, would you do to handle the income loss? And, how long would unpaid rent set back your personal rental income goals? Would you need to delay retirement? Ask yourself if you would be giving more financial consideration to the applicant than you would to friends and family. If so, are you okay with that?
Finally, since this really nice applicant has a history of money troubles, are you prepared to go through a financially and emotionally costly eviction process if they run into more trouble and just cannot pay rent?
You have been putting yourself in your applicant’s shoes. Take a minute to put yourself in the shoes of another business person, someone who runs a for-profit business. Ask yourself if your bank’s loan officer would cut you a break on collateral requirements because you’re such a nice guy/gal. Would your contractor let you skip a payment because you had a lengthy illness? Would you feel comfortable asking your contractor for that payment forgiveness?
If you turn them down
It is a violation of federal law to turn away applicants because of their race, religion and family status, among other reasons. Some states require landlords to apply identical standards to all applicants and to tell them, in advance, what your acceptance criteria are. This makes some landlords very nervous about denying applications.
But there is no reason to be nervous if you are fairly applying legal criteria. And, ability to pay rent is the primary qualification criterion. A tenant who has a record of inability to pay can be rejected without qualms.
In denying an application, keep the message polite and concise. You might use a form that includes denial language, or you might write your own note.
If you accept them
Veteran landlords usually have strong opinions about whether to take a chance on an applicant with a shaky financial history. Some will never risk it. Others claim that some of their best tenants have been those with a bankruptcy or other credit problem – BUT they hold these tenants accountable at every step.
If you decide to accept an applicant whose financial history has been unstable, include a set of conditions that will protect you and will make your rent and security deposit expectations crystal clear. Don’t waver on these conditions. This will send the message that you are not overlooking a poor financial history; rather, you are willing to take specific, but limited, steps to work with that history.
Insist on a lease agreement that includes language that protects you legally in the event of nonpayment. These might include:
- A cosigner agreement. Be sure that the cosigner meets all of your financial criteria. This person does not live in the rental, but will make payments if your tenant does not.
- A late payment fee. Impose a fee for every late payment. Some states limit the amount of fees.
- Full payment of security deposit. Require this at lease signing. A tenant who can’t pay a deposit is expecting you to cover property damage, lost keys and other expenses out of your pocket. That is a giant “ask.”
- Returned check fee. Impose this fee within the limits of your state law.
- Biweekly payment addendum. If you are allowing partial payments, spell out the exact terms in the lease. Leave nothing to chance.
- Renewal leases. If you have a good year with a tenant whose finances are iffy, don’t let down your guard at lease renewal time. Keep your rules in place and keep your tenant accountable.
If after all this guidance, you’re still struggling with whether or not to accept an applicant with a shaky financial history, visit our Forum and see what other landlords have to say, or post your own question for our landlord community to answer.