I wanted to expand on the credit score criteria in any Tenant Screening Requirements just a bit.
It is a fact that lower credit score individuals are a high risk to insurance companies, and for collecting payments. It is a fact that lower credit score individuals engage in riskier behaviors.
Here is why tenants with a low (or 0) are high risk.
At any rental property, especially a multifamily complex, an insurance claim could be catastrophic not only to yourself, but to other owners, and other tenants. There is also the fact that lower credit score individual people have a high preponderance of poor personal behaviors.
This may be the fact that riskier behaviors are generally behaviors that are not acceptable by many people. Lighting off fireworks in a high-density environment, fighting, speeding, being drunk in public, DWI, driving without insurance, dealing and using drugs, etc. would be examples of risky behaviors that we would want to avoid.
Higher Credit Scores = Higher Profitability
If you are trying to create a more profitable environment, preventing insurance claims is one way. Creating an environment where one tenant does not scare away another tenant is another. Both of these can be traced to credit score.
When an individual does not have a credit score, we do not know if in a few months it will be 400, or 700. But we do know that having a good credit score is a choice people can make. By applying for a secured Visa card, available at most banks and many places online, a person can have a 700+ credit score in less than six months. There is a 99%+ approval rate for these cards. So, a solid credit score is easy to be had. Why do people not want to get a good score, or are unable to get one?
When a person has bad credit, then goes to a cash basis lifestyle, they will eventually lose their credit score but not their credit history. We recognize this as a person who used to have bad credit, and probably bad behaviors, and reject them. We look for any ‘bad’ hit on their credit report, and criminal reports, no matter how small. Bad people cannot stay good forever, so there is usually something that shows up.
A Good Credit Score Takes Work
A credit score is the one thing that people have to do something positive to achieve. A clean criminal record can be had by just avoiding getting caught.
When a person has a perfectly clean criminal record and a clean no-score report, it is generally someone who has been in the country a short time, or a young person who has not applied for any credit. Both are high-risk, as the criminal history time frame that we can check is short. Any juvenile records are not available, nor are records from other countries.
The National average credit score for rental applicants is ~658. This is the same as my experience screening tenants for a large complex. We want someone without a credit score to be on the lease with someone that has at least close to an average credit score, or 650. The no-score applicant must also be someone who has a 100% clean record otherwise, both credit and criminal. This indicates someone that we expect is a person that will demonstrate financial and personal responsibility in the future, but has not yet had a chance. We want to avoid someone who has given up and dropped off the financial system radar. The problem is identifying both groups with near 100% accuracy, an impossible achievement.
Tenant Screening is not Perfect
In developing any tenant screening criteria, you will by definition exclude great people. You will let sub-par tenants in unknowingly. There is no perfect system, but you need a system that can be used across all prospective tenants, and is a color blind system. Credit scores and criminal records are two that pass those tests. Hopefully any criterion keeps most of the problematic people out, and does not exclude too many good ones.
With only about 10% of the people having a score below 560, a minimum of 575 probably excludes about 15% of renters. This is a small price to pay to have a minimum quality tenant base for an entire complex. 575 is still low, but it excludes much of the low-quality renters.For a complex, 575 is not great, but not terrible. In a Single family home this is still way too low. For most landlords, especially if you want your life to be easier, you want to get at least an average renter, or above.
Have you ever taken a chance on a low credit score person for a renter? Did it work out? What was their credit score?