What if Prospective Tenants Do Not Have Credit History?

[OlegP]

Renters ... we, the landlords, need them because without them our business has little purpose. Having performed hundreds of analytical exercises over years, I must say that the mindset of a tenant vs. that of a homeowner is phenomenally different on the aggregate. Even at the same Beacon score, renters will go bad (miss payments on their credit cards, loans, and yes .. rent) 3 to 4 times more often than homeowners.



So what do you do when your prospective tenant does not have credit history? The bureau tells you the file does not exist. Do you just approve them, and miss a very important piece of information about them? Or decline them all and risk running your unit vacant?



Here is a Stability strategy I use:

- minimum 2 years at their last address

- minimum 2 years at their last job

- rent to income ratio no more than 35-40% (hey, they don't have any other debt )

- favourable review from their present landlord



In some cases their credit file does exist, but it is "thin", i.e. there is nothing there but inquiries or public records, and no Beacon score. If you see Bankruptcy, Collection Item, Judgment, Tax Default - enter at your own risk! If they have more than 5 inquiries in the last 6 months, beware of Credit Seekers! Otherwise, using the Stability strategy above it is possible to select very descent tenants!!



After all, it is possible that no credit is better than bad credit!



Oleg Pereslegin

[email protected]

www.realestateriskmanager.ca

 

[Alvaro Sanchez]

I have been a landlord for a few years now (20+) and I have never use that strict "stability strategy" in fact, after reading your post I am suspicious as to if you ever been a landlord at all.



I do credit checks and never seen a beacon score on them... for the most part, I check that they are telling the truth, no collections, no bankruptcy or no judgments and solid payment history. If you can show that you pay your bills on time, you will get the key (regardless of your past).



If you have a great credit score, no debt, with 10+ years at your job and same at last address with great reviews from previous landlord BUT you do not pay your bills on time then NO keys....



If the history is "thin", I request a co-signer for the lease and do a check on the co-signer.

 

[housingrental]

Hi Oleg



I'd be concerned you have created arbitrary barriers to renting your property.



This will at times result in you turning away suitable applicants - potentially more desirable than the one you

accept that does meet what you are hoping for.



Here's one small example - potential applicant has verifiable material liquid assets but has recently gone through divorce and lay off - likely very desirable applicant but meets zero of your four points of the stability strategy you have posted above.

 

[OlegP]

Alvaro,



I appreciate your feedback on my post. I find it interesting hearing what other landlords have done. And of course as a 14+ year veteran in credit portfolio risk management, I have the added background in managing risk which is a large part of our business. Tenants are our greatest asset, I always think it best to pick them wisely with as much information as you can lay your hands on especially when their credit record is insufficient.



Not certain if you've had the opportunity to read the full article on my blog. The snapshot here on MyReinSpace really was only a small part of it, and may have been misconstrued if that was all you read.



In my blog, I refer only to a specific "type" of prospective tenants - either those with NO record at the bureau ("no hit"), or those with NO payment history on their credit files ("thin" file). In other words, there is no answer to how they pay their bills.



At that point, many landlords, particularly newer landlords than you or myself, may feel less than certain how to proceed.



As my blog suggests, they may want to start considering other factors, such as time at their previous address (home stability), time at job (stability of job and income), size of income (can these applicants afford the rent after their bills, food, etc. are paid), consistency in paying their rent on time.



So really what we are looking for are other signs of stability that we can acquire.



As for co-signers, I have no opinion there. Obviously I'm concerned about this as a viable option for older tenants, but certainly I wouldn't recommend against it. I simply don't engage in this practice myself.

 

[OlegP]

Adam,



Thank you for your comment. I agree that 2 years may seem like an arbitrary number. The logic is simply that if a tenant has a tendency to keep moving every year, I have to ask why. And, of course, I don't want to have to start all over again in 12 months painting the unit, paying my property manager to re-fill it, etc. 2 years is starting to indicate some degree of stability and commitment.



You are correct that there may be situations where this approach will let a perfectly good potential tenant slip through your fingers. To minimize that, we still interview our prospective tenants to see if there are mitigating factors warranting an override of the stability strategy.

 

[mortgageman]

A couple of thoughts since I look at credit bureaus daily.



1 - Lots of young people have thin credit due to being young. Get their parents to co-sign the lease or at least get the parents contact info so you can contact them if Johnny doesn't pay his rent. It's extremely common to see young men (especially guys working in trades) who make great money and don't have a credit history because they choose to pay for everything in cash. Many people don't realize that our society requires the use of credit now in order to get future loans.



2 - If I'm doing a mortgage application for someone who has thin credit then it's common to ask for a landlord letter and a utility company letter confirming payment has been made on time for one year.



3 - Life happens. If you see someone with a bunch of late payments clustered over a short period of time a year or two ago, there's likely a reason why. Perhaps they were seriously sick or injured and couldn't work. Perhaps they were laid off. Perhaps there was a divorce. These things happen and don't mean the person is irresponsible or a bad tenant. What's the most recent payment history been like following the event?



4 - In addition to credit score make sure to look at credit utilization. It's entirely possible to be maxed out on a couple of credit cards and still have a decent score. So look at their balances. Calculate 3 percent of the balance of the credit cards and lines of credit as their minimum payment for those debts.

Do those payments combined with their car payments, the utilities and the rent represent a potentially dangerous (say more than 40 to 45 percent) of their monthly income? If so they may not be able to afford to rent your place. Why set them, and yourself, up for possible failure?

 

[OlegP]

Good points Jason!



1 - I know many investors with student rentals use this approach, and I think it is a very good idea. Harder to implement when you deal with older tenants. I am surprised how many renters reach their 40s and 50s and still have no credit history. I guess credit mentality in much more prominent now than it was 20+ years ago. You are absolutely correct about the new society requirements for credit. New immigrants tell me this all the time. They feel paralyzed without credit in Canada. Hence, the reason I write about credit in my blog.



2 - I really like this idea. Helps fill the void if the credit file is blank.



3 - Agree to some extent. As somebody who deals with the banks daily, you know that they are not in the business of making excuses for people. IMHO, neither should be the landlords who want good tenants. We interview potential tenants, and absolutely take into consideration circumstances beyond their control. The recent recession put a lot of people in the auto manufacturing industry here in Ontario out of work. They could not find a well-paying job, lost their houses, and now they are my tenants in Kitchener, Brantford, etc. In other words, there are mitigating factors and circumstances. However, in many cases, you see complete mismanagement of money, overreliance on credit cards with insufficient income to support the payments. That's where we, the landlords, need to be skilled at differentiating between these two groups.



4 - Absolutely. I will write more on utilization in a later post, but you nailed the bottom line.



Thank you for your comments!



Oleg

 

[housingrental]

Thanks for the clarification Oleg

Re your above response I did not read your blog but just the summary on your post

[quote user=OlegP]Adam,



Thank you for your comment. I agree that 2 years may seem like an arbitrary number. The logic is simply that if a tenant has a tendency to keep moving every year, I have to ask why. And, of course, I don't want to have to start all over again in 12 months painting the unit, paying my property manager to re-fill it, etc. 2 years is starting to indicate some degree of stability and commitment.



You are correct that there may be situations where this approach will let a perfectly good potential tenant slip through your fingers. To minimize that, we still interview our prospective tenants to see if there are mitigating factors warranting an override of the stability strategy.

 

[invst4profit]

Oleg most of your screening criteria is in violation of the OHRC (Ontario Human Rights Commission criteria for screening of applicants) not that I care simply that I point it out.

For my screening, especially in light of Ontario's Tenants rights, credit score is crucial as a primary screening tool. I extensively Analise my applicants credit report. I also have a minimum score requirement. No score, or a thin score, is exactly that no score and is not better than a bad score. What we are seeking is information regarding a applicants likelihood of defaulting on a debt. Having no score does not provide that information.

No score or a score below my standard is a automatic rejection. I am not a social worker and do not care or wish to spend the time finding out why a applicant is not qualified.



I will risk losing a good potential tenant as opposed to taking a chance on a unknown. In this business our tenants are not only our greatest asset they are also our greatest liability as such taking chances on strangers is not worth the risk without sufficient information. No credit score, no key (violation of OHRC)



Once determined a applicant has a good score then a long term employer (violation of OHRC) and discussion with a previous (not present) landlord will be required to confirm acceptance. I personally do not accept any applicant on government assistance (also a violation of OHRC) because there income can not be garnished. I also consider rent to income ratio (also a violation of OHRC).



Bottom line good credit is crucial, I am not a social worker, I do not take undue risks fearing rejecting a "potentially" good tenant and although life does happen my applicants and tenants "life" issues are not of my concern or consideration. My business health is my primary concern.



Next applicant please.

 

[mortgageman]

By those definitions banks and trust companies violate OHRC every day when they decline credit applications based on applicants' unsatisfactory credit and income.

 

[invst4profit]

That is correct and legally they are allowed to however landlords are not. Different rules apply and in Ontario Landlords are generally considered to be at the bottom of the pole in regards to our rights to protect our investment over protecting the rights of tenants.



For example in Ontario the OHRC makes it clear that we are not permitted to consider any tenants expenses beyond rental amount when screening for affordability. This means that as long as a tenants rent is not greater than there total income we can not reject their application based on income/affordability.

We are also not permitted to reject a applicant based on employment. Meaning the source of there income, length of employment etc are not permitted to be used for screening purposes. Having no credit is not grounds for rejection either. We are not permitted in any way to hint at what may be a ideal or required tenant profile if it in any way suggests gender, family status, age etc.



You may find the human rights code is similar in all provinces however in Ontario we have strong tenant advocacy groups that are extremely anti landlord in cities like Toronto that constantly agitate.

 

[OlegP]

Greg,



Declining candidates with no credit history is the matter of choice, and tolerance for risk. Financial institutions have various risk tolerance, so do the landlords. One bank may approve a customer with Beacon score of 640 for a credit card, whereas another bank requires minimum of, say, 660. Some institutions do approve "thin" files, others do not.



I agree with you that in general customers with thin files are risky. That's why in my post I simply pointed out what in my experience gives me something to hang my hat on, i.e. minimum criteria for approval.



As for OHRC, I hear you ... I think they don't believe landlords should have the right to protect their business. Banks, with their much deeper pockets, for some reason enjoy the rights we are denied. I approached the government officials on this subject, and interestingly, in private conversations they agree that some of these rules are draconian towards the landlords. However, we don't provide that many votes during the elections :-(

 

[MichelSelim]

I use a safety belt: regardless of how good the applicant is I still give them three months fixed lease. By the end of the three months if everything is okay I will renew for longer period or not at all.

No credit is better than bad credit particularly for new immigrants of certain age bracket (my criteria: the older the better). I was once new to the country with no credit and little money. I lived in one place for 4 years before I buy my own.

 

[invst4profit]

Michel you are lucky having not invested in Ontario.

In Ontario landlords have no authority to terminate a tenants residence without cause once they are in possession of the key.

At the end of a lease tenants automatically become month to month under the terms of the original lease.

Justifiable cause for termination is outlined in the RTA however actually evicting or terminating a leases is extremely difficult. The mandate of our LTB is to protect tenants from landlords. Fair treatment and recognition of contract law is ignored by the board in regards to landlords rights.