Bad credit is like a dark cloud hanging over your head.
You know getting a home or auto loan is out of the question. But finding out that bad credit could negatively affect your prospects of renting may shock you.
Unfortunately, this is not a rare occurrence. The rental market is on fire. The percentage of renters and average rent is going up like they’re on steroids while the rental vacancy and homeownership rates are falling like rocks.
Here are some things that may allow you to rent with bad credit
- Find an individual landlord.
- Pay a larger deposit or rent in advance.
- Use recommendations
- Find someone to co-sign for you.
- Find a roommate
- Pay extra per month
1. Check your credit report
The first thing you have to do before you get on your merry way to start apartment hunting is to give your credit history a prolonged read. You want to be sure that there aren’t any errors or inaccurate information. Get your report and score for free from Credit Karma and Credit Sesame.
You have a credit report with each of the three major credit bureaus—Equifax, Experian, TransUnion. Check all three credit reports because your landlord could use any of them when vetting applicants’ credit reports.
The primary reason to do this is to pick up any errors and initiate a credit report dispute to have inaccurate information erased. Fewer negative information in your credit report translates to a higher credit score. This increases your chances of getting approved for a rental.
Sometimes, bad credit results from occurrences that are beyond your control. It could be a job loss, medical bills, a divorce, or some other situation. If so, you should write a letter of explanation which explains the situations that lead to negative credit history. Landlords often will take this into consideration if it’s reasonable.
You may qualify for a mortgage
In many situations, buying is often cheaper than renting is. If you struggle with bad credit, you may still have hope to get approved for a mortgage. FHA loans are the most popular type of home loan for first-time homebuyers because of the flexible credit score requirements. FHA mortgages are available to borrowers with low credit scores down to 500 with a 10% downpayment. If you a 580 credit score, you could qualify for an FHA loan with just a 3.5% down payment.
Having good scores will make the process of renting simpler. A good credit score is considered to be 700 or higher. However, if you have poor credit and believe your only option is to rent, you may be able to buy. You should consider the advantages and disadvantages of renting vs. buying. Here you can read more about how to get approved for a home loan with low credit scores.
Rent to own properties is another option to consider. However, you need to consider many pros and cons of rent to own homes before jumping into an owner financed home.
If you meet these credit score requirements, you should speak to an FHA lender about your options.
Increase your credit score before renting
Get added as an authorized user
If you have a friend or family member with a credit card. They can add you as an authorized user. You don’t even need to have a card physically. When you are added as an authorized user, the account information will appear on your credit report in 30-60 days. FICO does factor authorized users into their scoring algorithm. This is a simple and effective way to increase your score by 20-35 points quickly.
Pay down credit card balances
Your credit utilization ratio is the balance of your account compared to the limit. The higher your balance is, the lower your credit score will be. Get your credit utilization ratio below 15% to maximize your credit score. Here you can read more tips for improving your FICO credit score quickly.
More people are renting
In the top 50 US metropolitan areas by size, the percentage of renters increased from 36.1% in 2006 to 41.1% in 2014. In the same period (2006-2014), the average rent in the same locales (50 largest US metros) increased by 22.3%. [Source]
By contrast, the US rental vacancy rate fell from 9.5% in Q1 2006 to 7% in Q1 2016. The homeownership rate also declined in the same period, from 68.5% to 63.5%.
If it isn’t already clear, the bottom line is that rental properties are in high demand. The competition between renters is high, and landlords/unit owners/unit managers receive many applications.
And since landlords have a particular fondness for tenants who pay rent timely, they have the incentive to accept prospective renters who they deem to be less of financial risk. That’s where credit checks come in, especially in housing markets with high competition.
2. Find an individual landlord
Individual landlords are more likely to offer rentals with no credit check. They are also more willing to hear you out and even leap if your credit history is not a pretty sight, but you can show that your rental history and income are rock solid.
Most individual landlords don’t check credit
According to a third-largest credit bureau study in the US—TransUnion, 57% of landlords who participated in the survey said they don’t run credit checks on renters.
While that percentage figure gives a limpid description of the rising importance of credit checks in the leasing process, it also tells you that more than half of all landlords out there wouldn’t perform credit checks.
In general, large property management companies and larger landlords have more red tape than individual landlords. This makes renting a house or apartment with bad credit more difficult because they are more likely to have strict credit and income standards.
Here a couple of ways to find individual landlords:
Craigslist used to be a mecca for individual landlords. It is a muddled pool of all types of rentals from everyone, from individual property owners to large property management companies. But if you’re able to quickly differentiate the ads from renting companies and those from individual landlords, you can find multiple types of rentals—condominiums, houses, townhouses, and apartments easily.
Classifieds in a local newspaper
This may be offline (in a print newspaper) or online (on the newspaper’s website). Regardless of the display mode, local newspaper classifieds are valuable resources to find listings by property owners in the area in which you intend to find a rental.
Sunday editions typically have the most advertisements.
Real estate agents
Many homeowners still rent their homes through real estate agents.
Another option for homeowners seeking to rent their homes is to plant a “For Rent” sign in their yards. Thus, taking a short drive around the neighborhood can throw up some viable rental options.
Despite the generality, the likelihood still exists that an individual property manager you meet may be interested in your credit history. While you inquire about the rental, throw in a quick question about the criteria he or she uses to approve rental applications.
More often than not, you’ll receive a direct answer. One that includes or omits a credit check. The answer then clears the air about following the tips in the article (if there is a credit requirement) or not (if there isn’t a credit requirement).
How to overcome poor credit when renting an apartment
Since most apartment complexes will do a check credit check, you will need to strengthen your rental application in other ways. Having significant, consistent, and provable income is the second most important factor when renting apartments. If you can show you have the financial means, this can be just as important as your credit score.
Write a letter of explanation to give the apartment complex more insight into exactly what happened that caused you to have poor credit. Maybe you got laid off a couple of years ago, and it took a few months for you to find stable employment again. If they know, that was the reason, and ever since that time, you have been making timely payments, which will help your case.
3. Show me the money
Cash is king. And you can take that statement (and a wad of green notes) to the bank.
You can trash out as many inconsistencies in your credit report, throw a pity party about your credit predicament, or hunt for as many individual landlords as you can. Still, if a landlord uses a credit check as a criterion during applicant vetting, the only thing they want to be sure of is—CAN YOU PAY THE RENT ON TIME?
A bad credit report screams NO. Only dollar signs can change that perception as quickly as you click your fingers. And there are a couple of ways to do this. You can use one, some, or all of the key points below:
Proof of income: This may be in the form of tax returns, recent pay stubs, or a letter that verifies your employment status and income from your employer
4. Pay in advance
A one month rent advance and security deposit held in trust are customary. To reassure the landlord of your financial capability and commitment, you could offer to pay between three to six months’ rent in advance. Or offer to pay a larger security deposit than renters requested (this may not always be an option for properties with strict rules about deposits).
Automatic rent payments: If you offer to have your monthly rent payments deducted directly from your bank account, then the landlord does not have to worry about the prospects of hounding you before payments. This option is easy and convenient for both parties (you and the property owner) and has a massive appeal amongst landlords. Endeavor to make the proposition upfront. You would likely need to provide a letter of employment verification for validity reasons (as proof of your qualification for automatic monthly deductions).
5. Reassure with cash
This is an extension of the immediate tip above. Landlords approach the dicey challenge of bad credit renter applicants differently. Some may welcome the option of a higher advance payment. Others prefer to quantify the risk of your poor credit score as “risk” fees.
This is a reasonable proposition if you really want the apartment or need an apartment urgently. Negotiations may result in a slightly higher rent. Reassure with a co-signer/guarantor or roommate
6. Get a co-signer
Making a large advance payment or security deposit is an effective way to reassure a property owner. But what happens when your budget doesn’t permit you to make higher advance and deposit?
An alternative is to get someone to stand-in for you financially. By having a co-signer or guarantor, the risk is greatly reduced for the landlord. Providing a guarantor for an apartment lease is akin to giving collateral for a loan. A co-signer is responsible if you skip out on your rent. That said, having a co-signer in addition to making a more significant advance and deposit payment is double reassuring.
7. Find a roommate
And just like that, approving your application becomes a less risky endeavor for the landlord. Some landlords make it mandatory that only one person can sign the lease. In which case, it’d be better if your roommate with a better credit history signs the lease.
As an alternative, you may choose to move in with a roommate who already has a lease and can have you stay without a credit check.
Getting a roommate has the added advantage of allowing you to free up more money, owing to reduced financial burden from the sharing of bills. Having more money at your disposal allows you to put more towards clearing your debt with the resultant effect of your credit repair happening faster.
8. Reassure with recommendations
Recommendations are weighty, especially when they come from credible sources, such as a current or previous landlord, employer, or roommate.
These letters of recommendation shouldn’t only be glowing tributes to your character. They should also give insight into the nature of your financial relationship with the writer of the letter. This would soften the impact of negative entries on your credit report.
You may source for endorsements from landlords who only had short-term leases or even get a reference letter from your bank. The bottom line is that letters of recommendation should put your landlord at ease about responsibility and financial capability.