Should You Rent to Tenants with Bad Credit?

Let’s face it – no landlord or property manager wants to surrender hard-earned income on lawyers, waste precious time on court appearances, or lose money due to renter turnover and vacancy.

So, how do you find ideal tenants that won’t cause headaches and sleepless nights?

There are numerous factors to consider to ensure that you do everything within your power to reduce the chances of renting to someone with a less-than-stellar credit score. In this article, we examine strategies to mitigate the risks of renting to tenants with bad credit and highlight helpful tips should you decide to forge ahead and consider renting to those with less-than-average credit.

Should you rent to someone with bad credit?

Landlords and property managers can access a bigger pool of applicants by being open to potential renters with less-than-perfect credit scores. This can be especially beneficial in slower rental markets or for units that have been empty for an extended period.

Renters with poor credit might also be willing to pay slightly higher rent to secure housing, especially because their options are more limited. This can boost landlords’ revenue.

Additionally, bad credit doesn’t always mirror a tenant’s current financial situation. Someone may have had poor credit due to a past job loss or due to medical bills, for instance, but is financially stable now. If you consider renting to an individual in this situation, they may be an ideal long-term renter candidate, leading to lower turnover rates.

Lastly, property managers and landlords can negotiate more favorable terms, including larger security deposits. The key is to require co-signers or shorter lease terms that allow for a second look at the renter’s situation down the road.

How to discuss it with applicants 

Discussing bad credit with potential tenants can be delicate, but it’s vital for making educated decisions about applicants.

For starters, it’s important to be prepared ahead of time. Before the conversation, Understand the details of the applicant’s credit report and know which elements are challenging. It’s also essential to consider other factors, including income, employment stability, and rental history, that might ease credit issues.

Begin the conversation by explaining why credit checks are part of your screening process and how they help guarantee the financial stability required for you to maintain your rental properties. And clearly walk through the specific credit issues that concern you, i.e., late payments, high debt levels, or possible bankruptcies.

Giving the applicant a chance to explain the circumstances that led to their bad credit is also crucial. Life events, including medical emergencies, job loss, or changes in marital status, can impact credit.

After your conversation, consider whether the potential renter is making genuine efforts to improve their credit, such as paying off debts, creating a payment plan, or consistently paying current bills on time. You can even request supporting documentation that demonstrates the prospect’s efforts to remedy their credit issues, including letters from creditors or proof of recent payments.

How to adjust the lease and terms to protect yourself

Here are four strategies to use when adjusting your lease and terms to protect yourself as a landlord or property manager: 

Require Higher Security Deposits. Requiring a bigger security deposit can make up for potential risks. It provides a financial cushion should there be any rent payments or property damage that need to be paid.

Ask for Co-signers or Guarantors: Having a co-signer with good credit can provide additional security – this person is ultimately responsible for covering the rent if the renter defaults.

Offer Flexible Lease Terms. When you offer short-term leases, you can reassess the renter’s situation after a couple of months. If the tenant proves reliable, you can offer a longer lease.

Encourage Regular Communication. Developing a positive relationship with renters and maintaining open lines of communication can avert potential problems. Tenants are more likely to alert landlords about financial troubles in advance if they know they are supported.

How to prevent bad applicants and tenants at the start

Preventing bad applicants and tenants is imperative for maintaining a smooth, profitable rental experience. Here are some tips to help you along the way:

Implement a Thorough Screening Process

• Conduct thorough background checks, including criminal history, to ensure the prospective renter does not have a history of criminal activity.
• Check the applicant’s credit report to evaluate their financial responsibility and timely bill-paying history.
• Verify their employment status and income to ensure they can afford the rent.
• Reach out to former landlords to ask about the potential tenant’s rental history, behavior, and whether they typically paid rent on time.

Provide Well-Defined Rental Criteria

• Develop and provide written rental criteria outlining the qualifications you are asking for, including minimum income, credit score, and rental history.
• Use the same criteria for all applicants to ensure fairness across the board and avoid discrimination.

Develop a Comprehensive Lease Agreement

• Draft a detailed lease agreement that outlines renter responsibilities, rules and consequences should there be any violations.
• Ensure tenants fully understand the lease terms and their obligations before signing.

Conduct Interviews In-Person

• Arrange for in-person interviews to better understand the prospective renter’s true personality and reliability.
• Pay attention to any red flags, like hesitation to provide information, inconsistencies in their application, or negativity.

Lean On Income and Fraud Detection

• Require proof of steady income. You can request recent pay stubs, tax returns or a letter from their current employer.
• Incorporate fraud detection into your screening process. This will ensure their income is legitimate and help protect your property from potential issues and evictions.
• Consider prospects with stable employment histories versus those with frequent job changes.

Require Deposit and Rent Collection

• Collect a security deposit to cover potential damages and unpaid rent.
• Require the first month’s rent before the renter moves in.

Conduct Regular Property Inspections

• Conduct regular property inspections to ensure the renter is maintaining the property to your standards. Remember, early detection of issues can prevent bigger problems down the line.

Utilize Tenant Screening Services

• Use tenant screening services that deliver comprehensive reports, including credit, criminal, and eviction history.

The Bottom Line

There’s no question that renting to tenants with bad credit is a decision that requires careful consideration of potential risks and benefits.

While there’s undoubtedly an inherent financial risk, with appropriate screening and risk mitigation strategies, property managers and landlords can tap into a broader tenant base and conceivably secure long-term, stable renters.

At the end of the day, you should base the decision on a balanced evaluation of individual renter circumstances and your ability to manage potential risks realistically and successfully. If some of these tenants slip through your application process, check out our guide on how to deal with bad tenants to help you manage them appropriately.