High Income, Low Credit: What Should a Landlord Do?

A prospective tenant applies for a rental property and appears financially strong. The applicant states he earns more than 10 times the monthly rent, can provide bank statements and proof of income, and even offers to pay several months of rent in advance. There is just one concern: the applicant may not satisfy the landlord’s minimum credit-score requirement.

Should the landlord approve the application because of the applicant’s high income, deny it because of the credit score, or investigate further?

Income and credit measure different risks

Income helps answer one important question: Does the applicant appear to have enough money to pay the rent?
A credit report may help answer different questions:
  • Does the applicant generally pay financial obligations on time?
  • Are there significant collections, charge-offs or unpaid housing-related debts?
  • Is the low score caused by recent payment problems, high credit utilization or limited credit history?
  • Does the report contain information that may be inaccurate?
A person can have substantial income and still have a low credit score. Conversely, someone can have a strong credit score but insufficient income for the proposed rent. That is why landlords should avoid treating either income or credit as a complete picture of rental risk. The Consumer Financial Protection Bureau’s explanation of tenant-screening reports notes that these reports may include credit history, rental history and information from several other sources. (Consumer Financial Protection Bureau)


What should the landlord investigate?

Before making a final decision, the landlord, agent, or property manager should review the application using the same written criteria applied to other applicants.

1. Verify the applicant’s income

Income documentation may include:
  • Recent pay statements
  • Tax returns or 1099 forms for self-employed applicants
  • Employment verification
  • Bank statements
  • Documentation of lawful recurring income
  • Housing-assistance documentation, when applicable
Documents should be reviewed for consistency. The applicant’s name, employer, deposits, dates and reported income should reasonably align. Bank balances can demonstrate available funds, but a large balance does not necessarily prove that the applicant has stable, recurring income.

2. Verify the applicant's credit

Exactly how low is the credit score? What is issues are A credit score by itself may not explain the underlying circumstances. A landlord may choose to review whether the report shows:
  • Late credit-card payments
  • Medical collections
  • Student-loan issues
  • High utilization despite timely payments
  • A recent bankruptcy
  • Identity theft or reporting errors
  • Unpaid rent or housing-related judgments
  • A limited or newly established credit history
The CFPB has warned that tenant-screening reports can contain inaccurate or incomplete information. Applicants have rights to review and dispute inaccurate information under the Fair Credit Reporting Act. (Consumer Financial Protection Bureau)

3. Review rental history

Prior rental performance may be especially relevant because it concerns the obligation the applicant is seeking to assume.
A landlord may verify:
  • Whether rent was paid on time
  • Whether proper notice was given before moving
  • Whether the applicant complied with the lease
  • Whether there was significant property damage
  • Whether the prior landlord would rent to the applicant again
References should be independently verified. Contact information supplied by an applicant should be checked to confirm that the person is actually an owner, manager or authorized housing provider.

4. Apply the written screening policy consistently

Landlords should establish rental criteria before reviewing applications rather than changing the standards for a particular applicant.
  • Criteria may address subjects such as:
  • Verifiable income
  • Credit history
  • Occupancy standards
  • Pets
  • Smoking
  • Required documentation
Consistent standards can help reduce arbitrary decisions and potential fair-housing problems.

Does offering a large security deposit solve the problem?

Not necessarily.
A larger deposit may provide limited protection, but it does not replace careful screening. It also cannot exceed applicable legal limits.
California’s security-deposit rules are contained in California Civil Code Section 1950.5. Landlords should verify the current limit and any applicable exception before requesting additional security. (LegiInfo)
The California Courts security-deposit guide also explains how deposits may be collected, used and returned. (Self-Help Guide to the California Courts)
Calling money something else does not necessarily prevent it from being legally characterized as a security deposit.

What about six months of rent in advance?

Advance rent may appear to reduce financial risk, but it can create legal, accounting and operational complications.
Questions may include:
Is the payment truly advance rent or legally part of the security?
How must the money be held and accounted for?
What happens if the tenancy ends early?
How is the payment handled if the property is sold?
Does a local rent-control ordinance impose additional rules?
Would accepting advance rent create inconsistent treatment compared with other applicants?
A landlord should not assume that accepting six months of rent automatically makes an otherwise unqualified applicant safe or compliant.

Housing vouchers and source-of-income protections

Landlords must be especially careful when an applicant uses a housing voucher or another lawful source of income.
California law protects applicants from discrimination based on how they lawfully pay rent, including the use of Housing Choice Vouchers. The California Civil Rights Department’s housing guidance explains that housing providers generally cannot refuse applicants because they use rental assistance. (Civil Rights Department)
When calculating whether a voucher holder meets an income requirement, housing providers should ensure the calculation complies with California law and is based on the applicant’s portion of the rent where required.
The same screening standards should be applied fairly, but the standards must also account for the applicant’s lawful rental subsidy.

A better decision than “approve or deny”

The stronger question is:
What additional information does the landlord need before making a consistent and defensible decision?
Possible outcomes may include:

Approval

The applicant meets the landlord’s written rental criteria after income, rental history, credit information and identity are verified.

Conditional approval

The landlord’s written policy permits a lawful condition, such as a qualified guarantor, and the condition is consistently offered to similarly situated applicants.

Denial

Verified information establishes that the applicant does not meet an established rental standard, and the landlord follows all applicable notice and fair-housing requirements.

Additional investigation

The application contains inconsistencies, incomplete documentation or potentially inaccurate screening information that should be resolved before a final decision.

The lesson for landlords

High income should not automatically override legitimate credit concerns. At the same time, a low credit score should not be interpreted without reviewing the information behind it.
Professional tenant screening requires landlords to:
Establish written rental criteria.
Apply the criteria consistently.
Verify income and identity.
Review the substance of the credit report.
Investigate rental history.
Follow fair-housing requirements.
Provide required adverse-action notices.
Comply with state and local deposit and screening laws.
The objective is not to find a “perfect” applicant. It is to make a fair, informed and legally compliant decision based on verified information.

About JRealty

JRealty provides residential, apartment and commercial property-management services throughout Los Angeles and Orange Counties. Our team helps property owners market vacancies, coordinate tenant screening, manage leases, collect rent and oversee ongoing property operations.