Credit Score Hurdle Harder To Clear For Apartment Renters
Though millennials are flocking to the city to be closer to work, research shows the more competitive the market, the better the credit score that is needed to secure an apartment.
Justin Rubner wanted to live close to his office in Midtown Atlanta. While he thought he had solid credit, a mark from his past kept him from being able to rent one of the gleaming new apartment towers sprouting up in the city within walking distance from his employer. In the end, Rubner and his fiancee decided to lease at an apartment along Atlanta's new coveted BeltLine walking trail in the popular Old Fourth Ward neighborhood.
“It wasn't our first choice. Not because it's not awesome, but simply because the other one was a tad swankier, a bit cheaper and was walking distance to my new workplace,” he said. “We explained the bogus mark and the leasing manager had zero problem with it. They approved us in minutes.”
When it comes to credit scores, Rubner is not alone in finding them to be a major, and at times difficult, factor in the multifamily leasing process. Apartment owners across the country are raising their acceptance standards at a time when the industry is booming, and both millennials and baby boomers are flocking to cities.
The average consumer credit score in the U.S. to get approved for an apartment lease today has increased to 650 from 638 just three years ago, according to a new study by RentCafé. Those acceptance rates are scaling even higher as consumers move up the apartment quality ladder. The average credit score for tenants accepted into a Class-A apartment this year is 683.
The average credit score in the U.S. ranges from 669 to nearly 700 (an all-time high for FICO credit scores), according to a recent WalletHub analysis.
Regardless of the quality of the apartment building, the wave of new renters entering the apartment market has allowed landlords to be more choosy. Average credit scores, both on acceptance and rejection, have increased in the past three years as well. Those averages, though, vary among cities, with RentCafé's top five cities all showing average acceptable credit scores above 700.
The market with the toughest acceptance standard is Boston, which boasts an average credit score of 737 and average apartment rents of more than $3,200/month, according to RentCafé. San Francisco follows close behind with an average 724 score, Seattle and Minneapolis, both with an average of 711 and Oakland’s average 707 score.
In all cases within the top five markets, save Minneapolis, average rents exceeded $2K/month.
Why So Strict?
“It was pretty obvious that the more competitive markets, they are more demanding in terms of credit requirements,” RentCafé researcher and report author Nadia Balint said.
Balint said America's healthy economic expansion, increases in higher-paying jobs and the paradigm shift toward rental over ownership is all allowing landlords their pick of the litter.
“It's the demand really that's sustaining this,” she said. “We know that a lot of the cities in the top are actually dealing with housing affordability. You don't need just cash, you now need good credit too.”
New York-based GAIA Real Estate Managing Partner Danny Fishman said the average credit score of many of the residents in its portfolio of some 18,600 apartment units across the country has gone up this year, driven in large part by demand. The firm's occupancy is more than 96%, Fishman said.
“We can be more choosy,” Fishman said.
But the credit score data does not tell the full story. For one, many younger residents are not renting apartments solely on their own. Instead, their parents — many of whom are baby boomers with even more powerful credit scores — are acting as guarantors on leases.
Atlanta-based apartment owner RADCO Cos. CEO Norman Radow, who oversees some 18,000 apartment units in the Southeast — said he sees a lot of co-signing even among his Class-B urban properties.
“Many of the properties in Atlanta … are getting guarantors. And those guarantors aren't showing up in that data,” Radow said.
Credit Only One Factor
Fishman cautions that credit scores are only one factor that his and many other U.S. firms take into account when analyzing prospects. Another huge factor is earnings.
“When someone makes $150K [a year], it's less of a traditional question than if someone makes $60K, and you don't know if they could make [rent],” he said.
Fishman cites a recent project it acquired in Atlanta called Station R, a project near both a major medical center and the city's technology and law firm hubs. In a place like that, Fishman said income trumps credit scores.
“You'd be shocked to see the average income of the average household. They make, like, five times more than what we need to keep them in place. [Credit scores] are not even a consideration,” he said.
While credit standards have grown more stringent, Texas-based Pinnacle — which owns more than 170,000 apartment units — has also seen acceptance rates increase since the Great Recession, its chief operating officer, Larry Goodman, said. That is because credit scores are only part of a formula to determine acceptance, taking into account rental history, income and criminal records.
“The criminal [record] alone is a separate piece of that model. And if the criminal [records] hit a certain criteria, that’s an immediate rejection,” Goodman said.
Goodman said he is also seeing more guarantors on leases, especially from young professionals who are fresh from college and often saddled with student and/or automotive loans. That could prove a longer-term concern for credit scores.
“My daughter's in college in New York. She can't afford an apartment, I had to guarantee it,” he said.
Radow said for his firm, credit scores are also just part of the underwriting, but not the most critical part.
“We're more concerned with tenant history and income-to-rent ratio,” he said. “We have to [be]. People who are just getting by have circumstances. Do they understand that rent is their primary obligation? If they do, we want to help and put them in a home.”