Ron Denhaan, Realtor (949) 290-3263. Orange County, CA real estate specialist.

Leasing a home with bad credit

Lease a home with bad credit

If you have poor credit, renting or leasing a home is not impossible - Read on

Note: This web page was created to provide you with ideas and guidelines if you have poor credit and wish to lease a home. My team is no longer working with clients with credit issues.  

If you are interested in leasing or renting a home, but you have issues such as poor credit, a bankruptcy, low FICO scores, derogatory items, collections, judgment, or other negative items, there may be a solution for you! Many people are facing financial hardship due to a foreclosure, short sale, pay cut, job loss, divorce, illness, death of a spouse, or other cause. Poor credit is often the price they pay for their hardship. As real estate agents, we are seeing a very high number of people applying for home leases and rentals with fair, poor, or extremely poor credit. Losing a home is one of the worst examples. Going through a foreclosure or short sale can be catastrophic. One of the first things people ask is "where will I live afterwards?" Having damaged credit, many people are forced to go the apartment route or to move in with relatives, even though they would prefer to lease a home instead. Doing this with bad credit however, is very problematic. Landlords prefer tenants who have good credit, as they feel that this is the best indicator of a tenant's ability to pay the rent on time.

When analyzing an application, much of the landlord's focus will be on your FICO scores. This is often used as a primary indictor of your creditworthiness. FICO is short for Fair Isaac and Co., the organization that developed this numeric standard. FICO scores range between 300 (extremely poor) and 850 (Excellent). Many people underestimate the importance of good FICO scores when applying for a lease and feel that telling the landlord about your good payment history or paying a higher deposit will overcome a poor score - It won't! As a leasing professional, my opinion is that FICO scores are the number one factor in determining a candidate's eligibility by landlords. 

 

What do landlords consider to be "good" and "bad" credit? 

FICO Scores

FICO score graph

Applicants having FICO scores in the 800s are considered excellent candidates and they are almost always accepted over competing applicants. Landlords really prefer applicants having FICO scores of 700 or better, but scores in the mid-600s are often acceptable. Landlords are less likely to accept applicants as the scores dip into the low 600s. Getting an applicant accepted with low FICO scores in the 500s or below is very difficult. 

 

What are some of the ways that you can compensate for poor credit?

There are many ways that potential tenants try to compensate for poor credit on lease applications and offers. I have tried all of these techniques for clients and I have listed them below, in order of effectiveness (listed from least to most effective). 

 

Paying a higher security deposit      Success rate Success low  Low

Paying a higher security deposit has not been a very effective technique. If the FICO scores are very low, the landlord is more concerned about getting paid every month. The security deposit can only be twice the monthly rent (legally) for an unfurnished home, so even a high deposit is not enough to calm the fears of a landlord who feels he or she may face delinquent rent payments. 

Paying several months rent in advance  Success rate Success low to moderate Low to Moderate

I have had several credit challenged applicants who have offered to pay three months, six months, or even a full year's rent up-front. While this would appear to be very attractive to a landlord, there is surprising resistance to it. For one thing, it makes the tenant far more difficult to evict if they are a problem tenant and have paid many months in advance. I also highly discourage this for the tenant. You would be handing a property owner a very large sum of money. With all of the foreclosure and distress situations out there, you may have the bad luck of picking a landlord who is simply leasing the home to pocket some cash before he walks away from the property. As a tenant, you should always minimize your exposure and pay in regular intervals rather than paying out any large sums of money all at once (see better technique for paying in advance, below).

Showing high income, money in the bank Success rate Success low to moderate Low to Moderate

Having cash reserves is certainly a plus, but many landlords will question why someone who has high income or a high bank balance would also have poor credit. They may feel that this applicant is a "high roller" or is someone who simply can't manage money. They may also feel that the applicant may have had "peaks and valleys", where high income was followed by high spending. They certainly don't want to get caught in a "valley" while this person is leasing their home. 

Referral from current or previous landlord Success rate Success moderate Moderate

Landlords do appreciate a good referral from another landlord and this should always be part of your application package. However, some landlords do view this with suspicion; the main concern being the honesty of the referral. The new landlord may feel that the prior landlord is proving a positive referral because they are intimidated by the possible legal consequences of proving negative information (we do live in a highly litigious society). Or, perhaps they are just happy to be rid of this tenant, and if a positive referral helps, all the better. In any case, a referral alone rarely compensates for poor credit. 

Foreclosure or short sale, but few other derogatory items Success rate Success moderate Moderate

Some landlords get it. They know we are in the midst of the "Mortgage Meltdown" and that many people are paying skyrocketing adjustable mortgages on properties that have declined heavily in value. In this environment, many people have foreclosed on their homes or have been forced to do a short sale. Of course, credit scores suffer accordingly. If there are not too many other derogatory items on your credit report, some landlords may be sympathetic and be wiling work with you. Unfortunately, many homeowners do all they can to pay the escalating mortgage, often leaving other bills unpaid.. As a result, we usually see additional derogatory items accompanying the credit damage from the loss of home. 

Getting a Co-Signer or Lease Guarantor Success rate Success high Good to High!

There is simply no better way to compensate for poor credit on a lease application than by including a co-signer or lease guarantor. More than anything, landlords want the assurance of being able to collect the rent from someone else in the event that the tenant does not pay. I have had excellent success getting applicants approved when the application also includes a strong co-signer. However, many applicants are hesitant to ask a friend or family member to "go to bat" for them. It can be embarrassing to have your financial affairs exposed to someone close to you. Many people prefer to keep this part of their lives private. Also, I have had potential co-signers refuse to sign the lease after they realized that they would be "on the hook" for the rent if their friend/relative didn't pay. 

There are also professional co-signing services who will charge you a fee to co-sign for the lease and guarantee the monthly payments, in the event that you were to default on the rent. Be sure to check any of these companies out carefully, using the Better Business Bureau, referrals from past customers, and other sources. We do not endorse any of these companies directly, so be sure to do your own research.

Setting up an escrow account for rent payments Success rate Success high Good to High!

One other technique I have used for clients with very poor credit is to set up an escrow account with one year's worth of rent payments (assuming they have the funds). The funds for the year's rent are deposited to a third party company that will disburse the rent to the landlord each month. There s a small charge for setting up this escrow type of account. This provides the landlord with a great deal of security, knowing that the escrow company will pay the rent on time each month. This also provides peace of mind for the tenant, knowing that their rental funds are being securely held in escrow.



More tips - Do's and Don'ts for leasing or renting a home with bad credit

Do start improving your credit

There are many ways that you can start improving your credit scores. Search the Internet for many ideas and suggestions. There are organizations that will help you repair your credit. They do this by taking off items that are inaccurate or that do not belong to you. If you are not having success in improving your credit yourself, you may want to consider using professional credit repair assistance

Do use a real estate agent to help you

People are often tempted to shop for a home for lease in the newspaper, Penny saver, Craigslist, etc. Many of these homes are homes for lease "by owner".  While these ads may be legitimate, there are clearly some risks and disadvantages to going this route. For example, how do you know that you are dealing with the real owner of this property?  Do you know whether the owners might be in foreclosure and could be leasing the home to collect some cash? Will you as the tenant be protected by using standard leasing, disclosure, and inspection forms? Many people have lost their deposit and rent to leasing scams, so always use a licensed real estate agent to assist you! 

Do pay your rent payments on time

Once you have been accepted into a lease and have moved into a home, prove that you are off to new start by always paying the rent, on time

Do get a Co-Signer for your lease!

It's the easiest and most effective way to help you get accepted. Check with friends or relatives or use a professional co-signing service.


Don't try to negotiate the rent or the security deposit. 

Negotiations are best done from a position of strength, and frankly, having poor credit does not put you in the best of positions. You should really hold off on asking for price concessions. I have seen landlords get very upset when they are presented with a candidate with FICO scores in the 500s who is also making many demands or asking for a big discount on the rent. 

Don't insist on seeing homes right away

A good real estate agent will screen homes first and come up with a "short list" of homes and landlords that will work with your credit. Select your showings among these homes and keep home showings to a reasonable number.

Don't try to maintain your former lifestyle

Many people who have lost a high-end or luxury home seem to feel that they need to maintain their former standard of living. They often shun lower cost rentals, homes with less square feet, or homes that are less upgraded. If you've had a financial setback you should consider living a bit more economically while you are re-building your credit. Do not fall into the trap of feeling that you still have to "keep up with the Jones's". 

Don't falsify or alter your information

It's a criminal act to pass off an altered credit report so don't even try it. Agents will stop working with you immediately if they catch you. Listing agents will also check your employment, ask for proof of income, etc, so avoid putting false or exaggerated information on your application. Be upfront and honest at all times.

Don't look for "creative" ways to purchase a home instead of leasing. 

Everyone would rather own a home rather than rent one. Regardless, if you have major credit issues, stay away from lease-options, owner financing, AITDs, loan "take-overs" and other creative ways of purchasing rather than leasing. You will only get yourself deeper into the ditch!


Related links:

Leasing Frequently Asked Questions Can you negotiate a lease? Search for homes
Pet friendly leases Lease your home Help with a Short Sale


 

If you have any other questions on home leasing, leasing or renting with bad credit,  please feel free to give me a call!   

   Ron Denhaan

Ron@rondrealestate.com

DRE LIc# 01728866

Ron Denhaan, Realtor

 


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Note: The comments on this web page are the opinion of the author and they are not intended as a guarantee that you will be able to lease a home if you have poor or substandard credit. Using a professional co-signing service may be beneficial, but is not a guaranteed solution Potential renters are advised to do their own research regarding the rental process and/or the use of lease co-signing services. It is ultimately up to the homeowner (landlord) to accept potential tenants based on the landlord's opinion of the tenant's financial profile and their ability to pay rent (see Disclaimer above).