Landlord’s Guide to Renting to Someone With Bad Credit

What happens if you get an applicant with a bad credit score? Should you pass the opportunity to rent or risk having them skip payments?

Being a landlord can be a good way to grow your wealth for the future. However, anyone who has invested in real estate can tell you that income from rentals is anything but passive. It takes time, education, and the right tools to properly manage a rental and ensure your investments achieve the cash flow and profitability you need them to. And sometimes, you have to make difficult decisions, especially regarding unreliable tenants.

What happens if you get an applicant with a bad credit score? Should you pass the opportunity to rent or risk having them skip payments? Luckily, you can enter the deal without exposing yourself to too much risk. Let’s examine some handy tips.

What Is a Bad Credit Score?

As a landlord, you must understand how credit scores work. It’s a number scale between 300 and 850, calculated through income, previous bankruptcies, loans, and hard checks.

Generally, this is how the industry sees different figures:

  • 300 to 629 – bad
  • 630 to 689 – average
  • 690 to 719 – good
  • 720+ – excellent

Often, these numbers disqualify applicants from property renting since low credit scores lead to distrust.

However, not every person under 630 suffers consequences due to questionable behavior. Many can’t change their score because of circumstances out of their control.

Still, you’re taking a risk by working with somebody with a 350 credit score. Let’s see how you can minimize potential issues.

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Learn Why Their Credit Is Bad

When you get a rental application from a tenant with a bad credit score, your first assumption is likely financial irresponsibility. This guess can often be accurate, but there are numerous other reasons why people end up in monetary trouble.

It could be a failed business, medical bills, or even identity theft. Moreover, UMoveFree has noticed that many people move from one city to another, which is often the result of job loss, particularly for those in the service industry.

So, don’t be afraid to ask questions. The reasons behind the numbers could be innocent and even sympathy-inducing. In this case, you can reassure yourself by inquiring about the applicant’s renting history, requiring references from previous landlords.

Share Your Worries

With your assumptions and biases out of the way, you can discuss your concerns with the potential renter.

Try to gauge whether they’re truly risky. Although history is an excellent way to tell whether they’re the right person for the property, what they have to say can also inform your decision.

It might even happen that the applicant understands your worries and offers a form of guarantee. They could confirm that they repaid that debt that dented their credit score, pay several months’ rent in advance, or provide a contract they have with a current employer.

By understanding their point of view, you’ll also build a healthier tenant-landlord relationship. Regarding guarantees, though, there’s another avenue you could pursue.

Add a Guarantor

Landlords often use guarantors as co-signers while dealing with individuals with low scores or no credit history.

Guarantors ensure that you’ll receive payments on time by accepting to take on the responsibility when the tenant can’t. The co-signer faces credit report issues if they don’t meet the obligations.

Moreover, as these people act as a safety net, you only have to deal with them if there’s a renting issue. Even though they don’t live with the tenant, check their finances, too.

Require Higher Security Deposits

Asking for higher security deposits is tricky in several ways.

It might seem inhumane, especially if you’re working with a financially struggling person, but it minimizes risk on your end, safeguarding your property and covering potential losses. It’s also proof of your new tenant’s budgetary capabilities.

Be careful about the law, though. Some states prohibit security deposits higher than one months’ rent. Still, requiring what’s within your legal rights should put you at ease.

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Evaluation Is Key

All in all, if you’re dealing with several applicants, it’s usually best to go for the one with better credit. However, if your single potential tenant has a low score, that doesn’t mean you should never rent to them.

Make the evaluation process longer and more comprehensive, and don’t be afraid to turn them down if you don’t trust them. Still, keep an open mind and let the renter speak for themselves – you might end up with an excellent client that only went through a troublesome experience.

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