Hello friends and fellow investors. I hope you carefully read this article because knowing how to screen tenant buyers is one of the most important steps in the lease option process. You need a process for each step of your lease with option to purchase investment strategy. You have a process to take control of a property that you want to offer on a lease option.
You may or may not decide to make repairs and improvements but soon it’s time to look for and qualify tenant buyers. You post a craigslist advert, notify your preferred realtors, and use word of mouth to let associates know you have available a lease with option to buy. That’s the easy part. You’ll quickly have a stack of interested prospective applications on your desk and inbox. Next, comes the critical step of how to screen tenant buyers.
Steps to Screening Tenant Buyers
Your goal when choosing a lessee-buyer is weeding out those that have absolutely no hope of obtaining bank financing in the foreseeable future from those who will be financed with a few touch ups to their credit or financial situation. Nothing is worse for a seller than being stuck with a lessee-buyer who can’t obtain a mortgage and complete the purchase. Make no mistake, it should be clear to you from the beginning that people wanting to purchase on a lease option are almost certain to have credit problems. When you learn how to screen tenant buyers, you can limit your risk and maximize the probability that the purchase will be completed.
How to screen tenant buyers involves more than the normal rental application. Until you’re comfortably experienced qualifying potential buyers, I suggest you bring a mortgage broker into the process. In fact, it can be a good idea to always use a mortgage broker. Mortgage brokers have the ability to screen a potential buyer’s probability of obtaining a mortgage in the near future and define the quickest route of making this happen. Literally, this is your best process of selecting a solid lessee-buyer. You’re still going to make the final decision.
However, if for whatever reason, the application is reviewed by you, it should include the following personal information from the lessee-buyer.
Basic Application for How to Screen Tenant Buyers
The basics. Full name and SSN along with number of people and names of others that will be living in the home (others in the home is more for lease purposes than purchase – you’re collecting both).
Residence history. Present address and landlord contact information (assuming it’s a rental). If the person hasn’t lived at the current address for at least two years, you’re going to want to know why and references to previous landlords.
Money is a critical factor in how to screen tenant buyers. Mainly, how much do you want up front? You need to have made some decisions before you get to this point. Do you want first month’s rent, plus security, plus the option fee? This adds up to a hefty amount for a person not yet qualifying for a purchase. Where will the money come from? Savings? Borrowed from relatives? Bank loan? A bonus from work they are planning on? Keep in mind that if the money will be borrowed, it’s another monthly payment obligation that won’t show up on their current financial information that you’ll also be reviewing.
Employment history. You want to review and verify employment information for all people that will eventually be listed on the title or deed of the home. You need the name and address of current employer(s). Years on current job(s). Years employed in this particular line of work or profession. Position/title/type of business, and work phone. Supervisor’s name and phone number. Ask for previous work history if the person(s) have been in the position for less than two years.
Income information. Begin with monthly base wages or self-employed income (you may want to see recent income tax filings). Other monthly income such as bonuses, overtime, commissions, along with investment dividends and interest. Also other financial resources including bank account information (consisting of name and address of bank, savings and loan institution, or credit union). Type of account(s) held (savings, checking, CD, money market etc.) and account numbers. Next, look at what they pay out each month.
Debt information. All monthly living expenses. Liabilities such as credit card debts, auto loans, alimony, child support or judgments. Include account numbers, outstanding balances, minimum monthly payment amount and months left to pay.
It’s just as easy to have potential lessee-buyers complete the very same application that all mortgage professionals use to pre-qualify prospective borrowers. This is the Uniform Residential Loan Application (also called a 1003 Loan Application). This form will eventually need to be filled out by the lessee-buyer prior to obtaining a mortgage, so why not just have them do it right off the bat as a part of the screening process?
How to Screen Tenant Buyers – The Right Credit Score
Something important to consider about how to screen tenant buyers is the cost of pulling multiple credit reports. You may find a qualified applicant with the first application or you may go through seven or eight before finding one that is acceptable to you. At $35 to $45 a pop to pull their credit reports, you don’t want the burden of this cost. A motivated applicant that believes they will qualify should be willing to pay this fee up front.
It takes seven years for a credit problem to fall off a person’s credit report. That means you may find occurrences of when people had a temporary credit problem caused by the high unemployment rates and rampant foreclosures during the recession. Those events are a thing of the past. As each month passes, these count less and less against their credit score. The most qualified tenant buyers will have a rising credit score over the past several months and years.
How to screen tenant buyers can be a challenge when deciding what an acceptable credit score is. The Federal Housing Authority (FHA) sets minimum scores that vary depending on a multitude of things. These include what program is being applied for and the amount of down payment being made. However, ultimately the FHA guarantees the loan but doesn’t originate the loan. Originating the loan is done by individual banks that set their own credit score standards. Still, the FHA standard is the logical place to begin when considering an acceptable credit score.
Generally, the FHA requires a FICO score of at least 580 to qualify for a low down payment loan guarantee. Exceptions can be made for FICO scores between 500 and 579 if a down payment of 10% or more is being made. For those with a credit score below 500, about the only ones that qualify are those meeting the requirements of FHA 203(h) – Mortgage Insurance for Disaster Victims.
By Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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