How I Underwrite Rental Applications to Mitigate High-Risk Tenants

My partner and I have acquired and leased hundreds of rental units. As co-owner at my organization, I still have the final say on approving rental applicants. As much as I want to delegate the task, I am aware it is of pretty high value. Having a great tenant in your property is crucial. A troubled one who is constantly late on payments and complaining about dings on the refrigerator can be a headache. A troubled tenant can eat up your cash flow if they’re not paying and you have to evict and replace them.

Leasing Agent

I have an in-house leasing agent who handles collecting the paperwork and necessary documentation from rental applicants. The needed documents include the most recent three pay stubs or current lease and bank statements (if self-employed). Once all this is submitted, the agent starts the underwriting process. Be sure to obtain all the necessary documentation from the prospect. It is important that you have a clear picture of the prospect’s history to verify they are qualified to pay rent to you properly. If they are not willing to provide all the information, then move on.

Our Criteria

Criteria for screening tenants can vary depending on what class of property you’re in. For example, with a C class property, you may allow 600 credit score tenants, and with an A class requires a minimum score of 700. I am mostly dealing with the working class. These professionals tend to have just an OK credit score. That is the reason why they are paying $700 to $800 in rent. I run their credit to make sure there are no outstanding balances from utility companies or judgments from landlords.

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My tenants must produce gross 3x the monthly rent. This is by far the most important factor in approving a tenant. If they don’t have that, they must have a co-signer who does. Additional criteria include having no prior evictions within seven years of the date they’re applying for the home, having at least one year on the job (or proof of prior job stability), and having no felonies within the past five years.

Stick to It

It is always best to remain objective when underwriting rental applicants. If they do not make enough income or have been at their job for only two months, then you simply have to move on. You want to stick to your criteria because you want to treat every applicant the same.

Final Approval

I am an optimistic person, but I’ve seen some interesting stuff in my days of underwriting tenants. I was almost fooled by tenants having a friend pose as their landlord and submitting fraudulent pay stubs. When I get the file from the leasing agent, I look for red flags that may have been missed, such as fraudulent pay stubs. Then I start taking a look at income, landlord references, income, etc.

To date, I have not had to evict a single tenant I placed, and I plan to keep it that way.

Source: biggerpockets.com