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Using Credit Score Tenant Qualification

Let’s say you have just received an application from a prospect for your residential rental property. An important consideration for you is going to be her credit history. But what weight should this history have compared to other qualifying criteria, and how important should the credit score itself be compared to other criteria?

As a professional property manager, I put little stock in the credit score itself, but the history used to derive that score is very useful. Credit scores may be useful for creditors that have to justify their decision-making to other higher ranking bureaucrats or perhaps investors. But in the property management business, this is rarely the case. Some professionals, perhaps those less confident in their own judgment or decision-making ability, might ask a property owner to weigh in on the decision, but I rarely do this. Indeed, I think my credit-history interpreting skill is one of the reasons the property owner has hired me in the first place. And truthfully, those that lean too heavily on this sole criterion may be truly seeking only an alibi-someone or something to blame should things later fall apart. While it’s nice to be able to divert accountability, this does nothing to remedy the problem, which was a decision made on a bad premise.

I am certainly interested in the prospect’s overall credit picture, which is what the credit score depicts, but I am really more interested in why and how she got the score. In fact, the score itself is not even considered in my appraisal of the prospect. For example, if our prospect lost her job and had to let her home mortgage go into foreclosure, her score will be ruined for years. But I am more interested in the money management discipline she demonstrated before and after that tumultuous event. That will tell me more about the character of person than the score.

In my qualification decision table, I put the most weight on rental history. I want to know how long she lived in the same place, and how well she treated the property during her stay. Did she pay her rent on time? Were there any bad checks presented? These are the kinds of questions I want answers to, and these are things that do not show up in a credit report, because rent is not considered a debt by the credit reporting bureaus-another reason to be wary of the score, which is generally designed to help creditors evaluate loan risk, not rent.

I am also interested in the tenant’s employment or source of income. Does she have a job? How long has she been employed by the same employer. What does her debt/income ratio look like? How stressful will it be for her to make the rent payments? These are the kinds of questions I want to ask about her payment potential.

I will definitely look at the credit history, but for me, rental history and source of revenue are far more important considerations that indicate the probability that a prospect will become a good tenant.

Daniel R. Wilhelm,
Executive Broker

The author is neither an attorney nor an accountant. Nothing written should be construed as legal advice. Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances. Consult with a professional before making tax or legal decisions.

Important Things To Know About Commercial Real Estate Loans

Commercial real estate loans are considerably different when compared to residential loans. They actually are much more complicated as they carry terms and conditions that are very different when compared to that of residential loans. This is one of the reasons that most of the investors fear to venture in the commercial real estate market.

Smaller investors of residential real estate are typically limited to somewhere around four to ten properties that are valued in between hundreds and thousands of dollars before the lenders conclude that it’s the sufficient risk level and no further loans will be made. The loan requirements for commercial properties can significantly vary between the private lenders and banks. Also, the loans that are held in the portfolio of a single lender may vary based on the risks perceived by the lenders.

Commercial Bank Loans

Normally, the banks want you and you and your partners to come up with a minimum of about 20 – 25% of the property value as the down payment. For instance, if the property value is about RS 4 Cr, you’ll have to contribute about RS 80 Lakh- 1 Cr as the down payment. Also, the recent researches have shown us that, most of the businesses have failed because of the lack of adequate capital to meet the needs.

For that reason, banks often require the business maintain a significant cash reserve that can be drawn on if cash flow is not adequate to make the loan payments. This financial requirement is in addition to the hefty down payment. One strategy that some commercial investors use is borrowing as much money as they can (even at a higher interest rate) to provide ample capital to build out the business and thereby increase cash flow.

Private Commercial Loans

Private lenders or the non-bank lenders typically offer less rigorous requirements for commercial loans. There are a few lenders who require lower down payment (range of 10-15%). These lenders often agree to carry to the loan amount up to 20 or 30 years until it’s paid completely (in most of the cases). However, they charge the slightly higher interest rate when compared to banks (1% or 2% higher than bank rates).

But when you do all the maths, the higher interest rate might not look very expensive as it appears the first time. Calculate the cost of higher interest over the period of loan and compare it with the cost you pay to open a new loan (2 or 3 times as the balloon payments come due).

The emergence of private or non-banking lenders is challenging the banks on their traditional terms of loans. While the banks are continuing to tighten the requirements to sanction the loan, these private lenders are moving towards a larger share as it is making it easier to qualify. So, if you are looking for a smaller commercial loan (less than 15 Cr) or a medium loan amount (less than 35 Cr), consider taking your time so that you can find the lenders who can offer you the acceptable time and term constraints.

Best Three Tips To Find Your Rental Property

With the rising cost of properties, It has been harder than ever to buy a new home. Of course, people cannot do without a roof, and there comes the choice of rental properties. Finding the right home isn’t going to be easy, especially in US and Canada, where landlords are charging insane prices for almost every single home. As a smart tenant, you have to go a step ahead and decide on certain things before narrowing down to certain choices. In this post, we will talk of some of the things worth considering before you find your rental property.

Start with an online check

Gone are times, when you would need to spend hours on the weekend trying to find ads for rental homes! Thanks to the internet, things are much easy today, and you can find some amazing sites that enlist rental properties for most states and areas of US. You can check properties based on your needs, and it is very easy to sort a few options. Some of the sites connect the tenants with the landlord directly, which makes the process of negotiation and discussion much easier. Just make sure that you choose the right website, which has plenty of properties.

Check the budget

It is essential to have a budget for your home, but don’t set an amount based on your whimsies. There are always a few trends in the rental market when it comes to prices, and hence, you should spend some time researching on the same. Make sure that you check for the actual rent, added expenses if any and other long and short term expenses. Typically, rental sites can give you a good idea of how much you may need to shell for a particular type of house, but you can also check on other sites too.

Know what the lease means

Many tenants don’t read rental agreements in detail, and that can have serious consequences. There are usually a few things that you should note. The first thing is the length of the lease, which should be clearly mentioned. Secondly, you need to check for deposit requirement, and how the landlord is going to deal with the refund when you move out. The third part is property maintenance, and you should know if there are any expenses that are payable every month.

Also, not all home owners allow pets, so if you intend to bring your pooch home, always discuss the same. Sometimes, homeowners and landlords don’t allow changes in the house, like adding of special lights and painting, and hence, you should talk on the same. If you are going to have roommates, you need to know the arrangements with them, and the lease sharing clauses, if any.

If you can check for these aspects, it would be pretty easy to find a house that would eventually become a home. Always make sure to talk to the landlord directly, so that there are no misleading facts and talks. Start checking online right now!