As a landlord, you face many challenges; noisy, lazy, rude tenants, property damages, and bills. You often encounter another problem, too, not being able to rent to some applicants.
Let’s say you have an empty apartment ready to rent, and everyone who applies has bad credit. This can be frustrating for you, especially if they appear to be good potential tenants. Don’t worry; there are options for you.
See if the potential renter is able to have an honest discussion with you. There may be valid reasons why their credit score is low. They may have had some issues when they were young but have smartened up their financial act since then.
An open chat about what’s happened in the past could give you an indication of the type of person they are. Everyone makes mistakes. Unfortunately, credit agencies don’t have much room for compassion or understanding. As a person, though, you do and you can always find useful information on UMoveFree.
Who Are They?
Based on their age and current life situation, a poor credit report might be easy to explain. If your potential tenant is a student living off-campus for the first time, they may have little to no credit history yet.
A recently divorced person looking for their own home may have a bad history as a result of the other party, which could be well explained. A 50+-year-old corporate CEO may have a harder time convincing you of their situation, though.
How Bad is it?
There are also various incidents of bad credit. 500 is considered a really low score. However, this is the case for only 4% of Americans. Things might not be so bad, which is why a conversation could be beneficial to both of you.
For example, an occasional credit-card payment missed possibly isn’t the act of someone embarking on a life of financial ruin; it might just be a case of forgetfulness and easily remedied.
Of course, if they’ve declared bankruptcy, had a number of failed businesses, and property repossessed, then no amount of explanation is going to satisfy you. In this case, move on.
Increase the Security Deposit
Another way to let your property to someone with poor credit is to ask them for a more substantial security deposit upfront. In general, up to one month is required to move in.
Consider asking for an additional amount, perhaps two or even three months. Be careful here, though; some states have a maximum limit that you can request, while others, like Texas, have none.
You could make an arrangement with the potential tenants that if they pay their rent on time, every time, for a number of months, that you offer to return some of the deposit. This shows goodwill on both sides.
These days, online payment options, such as direct debits, are the easiest way to ensure timely rent deposits. This is convenient for both parties as it’s set, and no one can forget.
You may prefer to be paid in cash, and that’s not a bad idea to ensure immediate payment, but request that it be done before the end of the month.
If your tenant has a history of not covering their credit card minimum amount on time, don’t accept that as a payment option, and absolutely avoid taking checks from any tenants with poor credit.
Ask for a Guarantor
The simplest way to ensure rent payments from a tenant with poor credit is to ask them for a co-signer of the lease. This person needs to have a clear credit history and will guarantee to pay the monthly installment if the primary signatory falls into trouble again.
Having a guarantor is a wise choice if the tenant is new to the property market and has no credit score of any kind. This person won’t live at the property but will be responsible in the case of any default.
This works exceptionally well if your potential lessee is a student, and one of their parents agrees to co-sign. The tenant then has a double duty to answer to both you and a potentially unforgiving father or mother.
Another way to determine if your potential lessee has improved on their past financial mistakes is to check for any recent savings history. This is the way many people with poor credit prove to a financial institution that they can make repayments on a personal loan.
If this person can show they have regularly been saving an amount equal to or higher than the monthly rent, this is a solid example that they can meet your commitment and may make a strong case for your acceptance.
You could consider offering a short-term lease. Rather than both of you committing to one year, start with three months. That way, if anything was to go awry, you won’t suffer too much.
On the other hand, if this goes well and they can prove to you that they can commit to the monthly rent, you can offer to extend or create a full-term lease.
Another way this is helpful is if you have a potential long-term tenant looking to rent a few months from now, you could get some rental income in the meantime. This way, you get to rent your property for a while and give another person a chance to improve their credit rating. This is a win-win for everyone.
It’s up to You
Remember, in the end; it’s your decision. If you have numerous empty properties, it may be time to consider letting them to those who don’t have the best credit rating.
Discuss the issue and see if it’s as bad as it appears. Consider increasing the security deposit, offering a short-term lease, or asking for a guarantor. Check if they have a good savings history, demonstrating good intentions. Finally, come up with a payment arrangement that doesn’t leave much room for defaulting.
Do this, and you’ll have full properties and happy tenants.