Analyzing a Renters Credit Score

Finding prospective renters in the easy part of being a landlord. A simple craigslist ad can generate abundant traffic and amount to many showings and rental applications! In a previous blog, we touched on how to comply with fair housing laws . The hard part comes when you need to then screen these applications. Aside from verifying their employment, income, and previous landlord references, the next biggest component used to identify a strong renter is their credit score. There is a reason banks analyze a potential borrowers credit score. They want to know how reliable they are going to be when it comes to paying their bank loan. Renting an apartment is no different. The renter signs an agreement to pay "x" amount of rent over a period of time in exchange for a place to live, and if their credit score doesn't reflect a strong payment history, how can you expect them to pay rent in a timely manner. I am baffled by the amount of landlords I talk to that do not pull a credit report on their renters. The conversation usually begins with the property owner complaining that they are loosing money on their building because tenants don't pay rent and I end up asking if they pull a credit report before approving an application. 9 times out of 10 the answer is "No." I understand that credit reports can be confusing to evaluate, especially when you are introduced to acronyms such as FICO, DTI, FCRA, etc. This article will give you the quick and dirty on how to reliably evaluate an applicants credit report and increase your confidence in your ability to distinguish the qualified from the unqualified.  

First thing's first, how do you obtain a credit report. The Vermont Apartment Owners Association has partnered up with a credit reporting agency. Their services are offered to all VAOA members and a reliable and accurate. Other third party websites are also available to landlords. A quick google search will turn up quite a few results. You want a report that can give you a recent FICO or Transunion credit report, along with a payment history and estimated monthly payments pertaining to an applicant's current debt. FICO score are the most reliable. 

You have a credit report, now what?! What does a good credit report look like? image below can give you a good idea of how a lender would evaluate a credit score. You, the property owner, should view a credit score with the same set of glasses. A good rule of thumb for landlords is to require at least one financially responsible adult to posses a credit score of 600 or higher.

The next piece of information you need to evaluate is the renters DTI (Debt-to-Income Ratio). This is the percentage of a renters monthly gross income that goes toward paying debts. You can calculate this by obtaining the applicants monthly gross income (income before taxes) and multiplying it by 12 (month in a year) to get their annual gross income. You then divide the annual rent amount + other annual debts by the annual gross income and multiply by 100 to get the D.T.I. ratio. (Annual Rent Expense + other annual debts/ Annual Gross Income) x 100=DTI . You ideally want to see a renter with a DTI ratio of 35% or lower.

EXAMPLE: Ron is applying to rent an apartment from Mr. and Mrs. Smith. (I know the name is cliche!). Mr. and Mrs. Smith charge $1000 per month in rent. Mr. and Mrs. Smith have also verified that Ron makes $5000/month making widgets at a local factory and has a truck payment of $300/month and a credit card payment of $200/month. Ron's DTI ratio would look like this: 5000 x 12months=$60,000/year in income. The landlords annual rent is $1000 x 12 months= $12,000/year. Other annual expense are $300 auto+$200 credit card x 12 month= $6000/year The debt-to-income ratio would be ($12,000 rent + 6000 other debt)/$60,000 income x 100= 30%. In this case, Ron would be a qualified rented based on his debt-to-income ratio. Now if Ron had a healthy Debt-to-income ration BUT a poor credit score. It may be a good idea to think twice about accepting him as a renter. 

Of course an applicants credit score is not the only reason to accept of deny the applicant. However, it is a very good place to start. Financially responsible tenants are generally well organized and have their act together. You can assume a good credit score and a strong DTI ratio will result in timely rent payments. Although, PLEASE be sure to check every reference possible and evaluate the application from every angle possible, you can never be to careful. 

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