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On paper, your tenant looks great: They have an excellent rental history and sparkling recommendations. Unfortunately, they disclose to you upfront (or admit when they fill out the paperwork) that they have bad credit. Should you shy away from this tenant? You may have struggled to get your property rented out, or you may be on the fence about other renters who have applied. In any case, it’s important to know your options when it comes to dealing with a good tenant with bad credit.
Start By Checking References
If your tenant appears excellent on paper and simply has a poor credit score, start by checking their references. Many things can cause poor credit scores: unresolved debt, unexpected debt or even a couple of years that were simply more difficult than others. You can’t tell by a credit score alone what put a potential tenant into a bad financial position. While you don’t want to ask those references what caused the poor credit — that’s a question for your tenant applicant — you can ask them about the tenant’s responsibility and behavior in the past.
These simple questions can tell you a lot about what the tenant will be like when they’re staying in your property. When you’re talking to references, ask:
• How often was the tenant late with their rent? A tenant who was never late with their rent, in spite of poor credit, is a good sign. On the other hand, a tenant who was frequently late or who didn’t pay their rent every month might not be a smart risk.
• Did the tenant take good care of the property? Did they notify past landlords promptly if any repairs were needed or if there was a problem? Did they take care of basic maintenance themselves? Was the property left in reasonable condition?
• How often did the tenant call about maintenance? Did they constantly have problems that needed to be addressed, or were they a fairly peaceful renter who rarely raised issues?
• How did the tenant handle interactions with neighbors? Were they a good neighbor, or were there frequent complaints about them? It’s particularly important to ask this question if you’re renting out an apartment building or condo, where the new tenant will be in frequent contact with others in the building.
• What condition did the tenant leave the property in when they left? If a tenant left the property in great shape when they moved out, they were likely responsible with the property in other ways. On the other hand, if they chose to trash the property before leaving, they lack respect for their former landlord — and they might well do the same thing to you on the way out.
There’s a lot more to a great tenant than a high credit score. By asking these questions, you’ll get a better idea of what kind of tenant you’re dealing with — and in some cases, that information may override their credit score.
Talk With The Tenant
In addition to checking references, take the time to talk with the tenant. A tenant who is willing to disclose their poor credit score to you upfront may also be willing to discuss what led them to that financial position. Past bankruptcy doesn’t necessarily indicate that the tenant isn’t making wise financial choices now, but it can still leave a stain on their credit report. Taking the time to talk to the tenant can give you a better idea of what put them in that position and what needs to be done in order to give you confidence that you’re making a good decision about renting to them.
Offer Options For Bad Credit
If you’re considering renting to a tenant who has a bad credit score, you may want to have options available that will make you more comfortable and confident with your choice. Work with your tenant to decide which of these options will work better for both of you:
• Ask for a larger deposit. If a tenant credit check comes back poor, chances are, tenants know to expect that they’ll be asked to pay a larger deposit upfront. Include in the contract that money from that deposit can be used, at your discretion, to cover unpaid rent.
• Shape your rental contract based on credit needs. You may, for example, opt for a month-to-month lease. You might prefer not to pay for electricity and water for a tenant who has a low credit score, even if those are usually included as part of the rent.
• Charge higher rent. When you have a tenant with poor credit, you might want to charge them more in rent. You may simply increase the amount of rent for this tenant, or you might let them know that as their credit score improves, you’ll take the rent amount back to where it was originally set.
• Create milestones that the tenant must reach. If you’re worried about a poor credit score, consider what milestones you’d like them to meet in order to prove that they are a responsible renter and that you’ll get the funds you need on time each month. Over time, you’ll find that this helps you build trust in your tenant.
Before you choose a tenant for your property, you should always run a credit check. Good credit can indicate a tenant who is in a better position to make sure that their rent is paid on time every month, which will make it easier for you to manage your finances. On the other hand, good credit alone isn’t everything. If you have an otherwise great tenant applicant with poor credit, these options will make it easier to offer them a place.