Tenant Screening - How to use Income to Rent Ratio
David Borden - June 3, 2015
Income to Rent Ratio – Income to Rent ratio, often incorrectly called rent to income ratio is the amount of income a potential tenant earns as a ratio to the advertised rent. For example, if an applicant earns $6000 per month and is applying for a property that rents for $2000, her income to rent ratio is 3:1. While this measurement is important, many companies use it incorrectly in their tenant screening decisions. Many companies set a strict requirement of at least 3 to 1 income to rent ratio. This policy immediately eliminates 18% of the most qualified applicants based on risk. In a study of over 15 million rental records conducted by TransUnion, they found that credit score was much more important than income to rent ratio. In applicants with high credit scores, but low income to rent ratio the default rate was significantly lower than those with high income to rent ratios and mediocre or poor credit. Many of these higher risk applicants would be accepted under most tenant screening policies with additional financial consideration.
Even though some applicants have lower income to rent ratios, they are a significantly better risk than those with better income to rent ratios but poorer credit scores. The fact is that applicants with higher resident scores have demonstrated a consistent ability to pay their debts on time. Applicants with great credit scores figure out a way to pay their bills. Don’t let great teants get away because of some arbitrary ratio.