It can be tempting to accept potential tenants with bad credit, especially in the coronavirus age—where a normally steady stream of renters may be drying out.
Normally, hard-and-fast landlord rules decry never straying from your minimum requirements. Exceptions to rules can lead to exceptionally bad tenants, but now, landlords faced with empty units are contemplating how to get units filled without having to worry about writing an eviction notice later.
Along comes a potential tenant with bad credit.
Credit issues are tricky. On one hand, they’re a good indicator of a consistent, stable tenant. On the other hand, it’s easy for renters, especially younger renters, to fall into sticky credit situations before they even really understand how credit works.
If you’re considering the risks of taking on potential tenants with bad credit, there are a few steps you can take to get a better picture of the applicant’s situation, security, and ability to be a good tenant.
Ask for proof of consistent income and rent payment history.
We mentioned this in our suggestions for renting to freelancers, but consistency is key when it comes to income and paying rent.
Especially given the current situation, you may encounter potential tenants with bad credit history who also had to seek new employment, and are thus unable to provide a plethora of recent pay stubs.
In these situations, ask for proof of current employment or rental assistance. Additionally, if the prospect can provide proof of consistent rent payments despite a job change, then that can provide some reassurance as to their reliability.
Ask for a guarantor or co-signer.
According to StreetEasy, the difference between a co-signer and guarantor is that a co-signer is a tenant who assumes financial responsibility for the lease, should the other tenant be unable to pay.
Conversely, a guarantor assumes financial responsibility of the rent but is not entitled to use the living space.
Guarantors are often family members of applicants who have a better credit history or income who can takeover rent payments should the tenant be unable to pay themselves.
Ask for bank statements.
Every application is different, but bank accounts are another good way for potential tenants with bad credit to show they can pay rent. If your applicant is able to demonstrate their ability to save money or show they have reserve funds, this form of documentation can be another way to approach a tricky credit application.
Ask for a landlord reference letter.
A landlord reference letter can provide reassurance if the tenant’s credit history is due to extraneous issues that don’t relate to late rent or eviction. Although this is not always feasible, it might still be worthwhile to ask your tenant for a recommendation letter for their former landlord.
Importantly, be sure to follow up with the landlord over the phone and ask a few probing questions to verify the authenticity of the landlord. It’s very easy to throw down “So-and-so was great” on a piece of paper and call it a landlord reference letter.
Following up is key to verify the reference letter is from an actual former landlord and getting more in-depth information about your applicant.
For Tenants With Bad Credit
Be proactive and transparent.
Sometimes a personal note from the tenant explaining their situation goes a long way.
Some landlords have had cases of tenants proactively reaching out to explain what they can expect to find. Providing clarity on the issue can help assuage worries about the tenant’s credit history.
Offer to set up auto-payments.
If your bad credit history is related to late payments, offering to set up rent payments to be automatically paid by the due date could be reassuring. RentRedi’s mobile app for tenants has auto-payments and—importantly—landlords can check if tenants have auto-pay enabled.
Potential Tenants With Bad Credit—Should I Sign Them?
Fundamentally, the answer is up to you and what’s best for your rental business. Some landlords will say it’s better to have an empty unit than an eviction. Some landlords will claim they’ve had great tenants who had not-so-great credit. One thing is for sure, regardless of what you choose to do, applications and screening are important.
Our mobile application provides a list of documentation (below) a prospect can provide to ensure landlords have a comprehensive selection of documents.
- Employment letter
- Most recent paystub
- Prior paystub
- Most recent bank statement
- Prior bank statement
- Most recent W-2
- Most recent tax return
- Prior tax return
- Photo ID
Make sure your application is thorough and can accommodate a variety of situations and provide plenty of documentation that can help you better assess the tenant’s situation. RentRedi’s tenant screening process takes a three-pronged approach: prescreening, application, and full background checks with credit, criminal, and eviction reports. These steps can ensure you have the full picture of the tenant’s renting history, especially if you’re considering potential tenants with bad credit.