Landlords utilize a variety of risk assessment tools and predictive models to help identify potential liabilities and possible threats to business operations. One of the biggest concerns for a landlord is whether a potential tenant could be relied on to pay full and timely rent. Accordingly, to reduce problems associated with rent defaults, a landlord screens an applicant for credit risk. The credit report is the most widely used screening assessment tool to evaluate an applicant’s ability and willingness to pay rent obligations as agreed.

By diligent screening a landlord seeks to determine whether the applicant has sufficient, verifiable sources of income to meet rent and other living expenses and has demonstrated satisfactory credit management in his willingness to meet debt obligations.

Financial ability and satisfactory credit management are at the center of applicant qualification and approval for tenancy. Consumer credit reports are valuable informational resources that provide critical data for financial analysis and evaluation. The information in the credit report should be considered in context of the source and reporting period of contributing creditors, not as an absolute indication of credit worthiness.

Financial Ability

An applicant’s financial situation is often the critical decisioning factor in tenant selection. A landlord will evaluate the applicant’s financial situation based on data from screenings such as a credit report, credit score, income verification, income to rent ratio, debt obligations, public reports and references.

Screening for ability to pay and willingness to pay should be backed by the applicant’s management of his financial resources to meet credit responsibilities. There should be adequate history of the applicant’s commitment to meet his financial duties and obligations.

Income

The ability to make rent is largely dependent upon income sufficient to pay rent, living expenses, and debt obligations. The income to rent ratio of 3:1 is a generally accepted industry standard for income qualification. For some landlords a steady income such as wages from a verified employer may be an important decisioning factor, possibly more so than other factors. While past history of meeting debt obligations is important, the future ability to pay debt is critical.

Financial ability to pay rent can come from various sources of income. Wage earnings are the most common source of income. Other sources of income include self-employment, stocks and bonds, trust funds, mutual funds, spousal or child support, government assistance, and income from rental properties. A landlord must conduct his due diligence for state and local laws regarding fair housing protections against source of income discrimination. A landlord whose income requirement for tenancy is proof of income from W-2 wage earnings is in violation of fair housing laws in some states and municipalities. In many states a landlord is required to disclose his rental criteria for tenancy and must provide applicants with the written standards for supporting documents for income/funds verifications.

Verification of non-earned income, such as interest, dividends, annuities, Social Security or disability benefits, IRA/401(k) pension distributions, other retirement plan distributions, court-ordered agreements for spousal support, child support or as awarded by lawsuits, and other investment cash flow and entitlement items, may be verified through copies of official statements made available to the landlord by the applicant.

Credit Report

Credit reports provide a broad overview of an applicant’s financial status. A consumer credit report as a primary credit screening tool allows a landlord to review the applicant’s credit history, open and closed accounts, and payment history. If the payment history shows slow pays or missed payments it may be an indication that the applicant could have difficulty in making future rent payments.

In analyzing the applicant’s credit report, many landlords focus on items that can be significant indications of credit risk. The frequency of late payments and/or a pattern of late payments on multiple accounts could be an indication of financial difficulty or an indication that the applicant does not take his credit obligations seriously enough to meet payment terms.

A landlord should note whether the credit report contains negative items or potentially negative items, such as collections, accounts past due, or debts discharged. Credit accounts sent for collection or collection accounts that have been charged off can be signs of credit risk that a landlord should not ignore.

The landlord should carefully analyze the applicant’s debt load in relationship to the applicant’s monthly income. If the amount of the applicant’s monthly payments against debt is subtracted from the applicant’s monthly income, is the amount remaining sufficient to meet the rent payment and cover reasonable living expenses?

Credit Score

Traditionally a landlord has utilized the consumer credit report as the key document for measurement of an applicant’s qualifications to rental standards. A scored credit report has been regarded as an objective, measurable, and defensible method of evaluating financial risk to the landlord’s business. The applicant’s use of credit, credit payment history, and debt exposure were set out as indicators of future credit performance.

There are a number of credit scoring models and each model may use different factors to calculate a credit score. A credit score is a general indicator of financial responsibility. It should not be used as an absolute measurement of credit risk.

A credit scoring model looks at how much is owed on all accounts, how much is owed on specific types of accounts, the number of accounts with balances and how much available credit is shown for each account. The proportion of balances to total credit limits for revolving accounts and the proportion of balances to original loan amounts on installment loan accounts will be a consideration in the credit evaluation. In brief, the more money that is owed compared to the credit limit, the lower the score will be.

Generally, a longer positive credit history on an account will have a positive effect on a credit score. Length of credit history considers the time since accounts were opened, the specific type of accounts opened, and the time elapsed since account activity.

The type of credit is also a factor in a credit score. A mix of different credit types, credit cards, retail accounts, installment accounts, revolving accounts, mortgage loans, or personal lines of credit, etc. is considered in evaluating the overall credit risk. Too few accounts or too many accounts of only one type of credit can be indications of potential risk.

Recently opened accounts are given consideration as to the number of new accounts and the type of accounts. New credit inquiries, both the number of inquiries and the time period in which they were made, may also have an effect upon the credit score. Some credit bureau models also give consideration to the re-establishment of positive credit history after past payment problems.

It is more likely that an applicant with a higher credit score will have the ability and willingness to pay as agreed, and less likely to default on his obligations. A low credit score should not automatically disqualify a potential tenant any more than a high credit score would automatically qualify the applicant.

However it should be noted that a credit score is only one part of a comprehensive credit risk assessment. A credit score serves as a general indicator of financial responsibility rather than an absolute measurement of credit risk. It can be used as a predictive model of the applicant’s ability to pay and to pay on time. It is not a guarantee that the applicant will be a good or bad tenant.

References

Landlords can contact rental references to confirm the applicant paid as agreed while a tenant at a former rental address. Credit references can be contacted for those creditors who have extended credit or otherwise established a financial relationship with the applicant but who do not report payments or payment history to the major credit reporting bureaus.

Rental Standards

A landlord must set his rental standards to meet his business requirements. Formalized written rental screening and selection standards set out minimum qualification requirements for tenancy. Typically these requirements specify a minimum gross monthly income, a satisfactory income-to-rent ratio, positive references from previous landlords, satisfactory credit report and debt payment history, no history of illegal drugs or illegal activities, no derogatory public records, and satisfactory background checks.

Setting high rental standards could help minimize risk of lease defaults. However standards that are too high can reduce the applicant pool and extend vacancy periods. Standards should be objective, measurable, and relevant to the applicant’s performance as a tenant. The rental qualification criteria should point to the important issues – the ability to pay timely rent, acceptable credit history, and satisfactory previous landlord references.

Each tenant selection is an informed business decision based on rental standards universal to the landlord’s business. Each and every potential tenant is evaluated using the same standards, in the same established process utilizing the same risk assessment tools.

Standards set by a landlord should take into consideration regulatory requirements, local market supply and demand, business necessity, property location and condition, and the landlord’s ability to carry business risk and his willingness to manage that risk.

Both landlord and tenant are bound to the contract terms of the lease agreement that includes the tenant obligation to pay tent and the landlord obligation to provide habitable premises and ensure the tenant’s right to quiet enjoyment of the premises. Early termination of the lease agreement breaks the contract terms and conditions of the lease.

Breaking the lease isn’t always a simple matter. Depending on the lease terms and conditions, applicable state statutes, remaining term length of the lease and circumstances of the matter, it takes careful consideration of all issues to end the landlord-tenant relationship in a legally compliant manner.

Early termination of the lease contract can be requested by landlord or tenant as a personal or business necessity.

As business necessity, a landlord may need to consider early termination of lease for legal reasons such as:

• tenant material violation of lease terms and conditions – e.g., rent defaults, property damage, or tenant illegal activities;
• lease terms and conditions specifically allowing the landlord to terminate the lease before the contact ending date.

To terminate a lease, landlords must follow the statute requirements of the state where the rental property is located. While each state may vary in requirements for lease termination, commonly, statutes require landlords to notify tenants of the intent to terminate a tenancy. Some states allow tenants the opportunity to cure a lease violation before the landlord can take further action for lease termination while other states allow a landlord to terminate a tenancy without giving the tenant a second chance to cure the violation. Notices commonly used for notification of intent to terminate a lease are pay or quit notices applicable for rent defaults, cure or quit notices applicable for other types of lease violations, or unconditional quit notices which require the tenant to quit the premises immediately without opportunity to cure the default. If the tenant fails to comply with notice requirements the landlord can initiate legal action to evict the tenant.

There can be other reasons a landlord may consider early termination of a lease, such as the sale of the rental property; the landlord’s intent to occupy the rental property as his personal residence, or extensive repair/remodel work to the rental unit that requires the unit to be vacant. For reasons listed above the landlord will need to work with the current tenant to negotiate an agreement for an early release date from lease obligations.

State statutes provide protection for tenants who have legitimate reason to request early termination of their lease. In some states landlord-tenant statutes allow a tenant to terminate a tenancy before the end of term without landlord permission for reasons such as:

• Military Duty – A tenant who is a member of the armed forces, or that tenant’s spouse or dependent, who delivers copies of reassignment or deployment orders to the landlord within the required number of days of receipt of orders.
• Domestic Violence – A tenant who is a victim of domestic violence, sexual assault, unlawful harassment or stalking, and who has a legal protection order or has reported the incident to the authorities.
• Harassment – A landlord or landlord’s agent violates the tenant’s right to privacy and quiet enjoyment of the property by stalking, sexual assault or unlawful harassment of the tenant.
• Habitability Issues – As a remedy to the landlord’s failure to maintain fit and habitable housing resulting in constructive eviction of the tenant.
• Property Damage – The rental property is significantly damaged or destroyed by natural disaster or other reasons beyond the tenant’s control.
• Violation of Privacy Rights to Quiet Enjoyment of the Premises – Intrusiveness of the landlord that violates tenant privacy, such as landlord entry to unit without tenant notification.

In a few states landlord-tenant statutes allow for early termination of tenancy for reasons such as tenant health problems, or tenant need to move to assisted living facilities or elder housing.

However, the most common tenant reasons for requesting early termination of the lease are personal matters such job transfer/relocation, job loss, divorce, serious illness, buying a home, moving in with family member, partner/roommate, other life events or changes in in lifestyle. In most states these reasons are not considered legitimate reasons for early termination of a lease. A landlord should be knowledgeable of the requirements of his state statutes for permissible reasons for termination of lease, notifications of lease default, intent to terminate a lease, and required procedures to terminate a tenancy.

Once the landlord has received notification of the tenant’s intent to early terminate his lease, the landlord should confirm the circumstances regarding tenant’s need to break his lease. The landlord has certain responsibilities to proceed in a legally compliant manner for early lease termination. The tenant should be reminded of his contract obligation for continued rent responsibility under the lease agreement terms. This means the tenant will owe the landlord rent until a new tenant can be found to fill the vacancy. However, the majority of states have statutory requirements or case law that hold the landlord responsible to make reasonable efforts to find a replacement tenant suitable under the landlord’s rental standards. This landlord obligation to actively find a replacement tenant is required regardless of the reason why the tenant has chosen to break his lease. The landlord has the duty to mitigate damages to the current tenant to help reduce the amount of rent that the departing tenant owes under the lease terms. The tenant will be financially responsible for rent payments up until a lease is signed by a new tenant. A landlord’s lease agreement cannot include a clause that waives the landlord’s duty to mitigate damages. While the landlord’s duty to mitigate includes trying to re-rent the unit as quickly as possible, a landlord does not have to prioritize filling this vacancy ahead of other available units nor does the landlord have to take just any tenant. The landlord should conduct his customary tenant screenings to qualify a replacement tenant and to set the offered rent according to his rent policies.

Considerations

A landlord should give careful consideration to a tenant’s offer to find a replacement tenant to fill the vacancy. While the landlord can appreciate the tenant’s good faith offer to bring in a new tenant, it should be the landlord’s policy and practice to exercise control over his business to ensure protection of his tenants and his property in filling a vacancy.

While using the tenant’s security deposit to cover lost rent due to early lease termination could be an option in limited circumstances, using the security deposit for that purpose leaves the landlord without funds to cover any property damage to restore the rental unit to good condition when the tenant departs. Before taking such action, a landlord should conduct due diligence on applicable state statutes regarding the use of tenant security deposits. As needed, consultation with an attorney experienced in landlord-tenant matters may be advisable.

To better protect his business, it can be simpler for a landlord to add an early termination clause in his standard lease agreement. The clause should detail the landlord’s policy and practice regarding a tenant breaking his lease. The subject should be covered during the new tenant orientation to make sure the tenant understands the expectations to fulfill lease terms and conditions, and the consequences of an early lease termination.

The early lease termination policy can include the requirement of a non-refundable early termination fee in lieu of rent responsibility until the unit is re-rented. However the landlord is not obligated to provide such an option and may hold the departing tenant to his obligations for rent until a replacement tenant is installed. With the tenant informed consent at lease signing, if the tenant’s circumstances change and the tenant breaks the lease, there is a set policy that applies to each and every tenant regarding early termination of the lease that helps to avoid claims of discriminatory treatment should one tenant be treated differently than another tenant.

What might be considered a reasonable early termination fee could vary depending on the reasons for terminating the lease, the current rental market, and various other factors affecting the landlord’s business.

It is usually best to calculate the early termination fee based on a conservative estimate of the actual costs of an early vacancy, remembering that there would be a vacancy at the end of the tenant’s lease anyway. Items to consider usually include costs of preparing the premises for the next tenant; lost rent during preparation down-time; marketing and advertising expenses; and lost rent during the marketing period until rent begins from a new tenant. Typically early termination fees range from one to two months’ rent. Payment of the termination fee releases the tenant from rent responsibility for the balance of the lease.

A landlord is not required to include an option for early termination fee and may simply hold the tenant to rent obligations until the replacement tenant is installed. The tenant’s acceptance of an early termination fee is binding on landlord and tenant. Should the landlord not be able to fill the vacancy for several months, the landlord cannot go back to the departing tenant to ask for additional fees.

Documentation

Written documentation is important to record the details of an early lease termination agreement between landlord and tenant and subsequent actions taken by landlord and tenant. It is preferable to require that the tenant provide written notice of intent to terminate his lease with specific details of the circumstances and the scheduled departure date.

Yes, there has been a recent update to the FHA Design and Construction requirements. HUD has adopted 5 new safe harbors, the first update of safe harbors since 2005. Effective March 8, 2021 the following standards are considered safe harbors under the FHA in addition to the 10 currently existing safe harbors:

• 2009 edition of the International Code Council (ICC) Accessible and Usable Buildings and Facilities (ICC A117.1-2009) standard. This standard is a technical standard for the design of facilities that are accessible to persons with disabilities.
• The 2009, 2012, 2015 and 2018 editions of the International Building Code (IBC).

It should be noted that the new HUD guidelines point out that the IBC is a model building code and is not law. The IBC has been adopted and/or modified by various states and cities. The IBC safe harbor applied for FHA compliance must be the model version of the IBC, not a modified local IBC code.

As background, The Fair Housing Act (FHA) requires all covered multifamily dwellings designed and constructed for first occupancy after March 13, 1991 to be accessible to and usable by people with disabilities. The FHA requires seven basic requirements that must be met to comply with the access requirements of the Act. It cannot be assumed that design and construction compliance with local building codes is FHA compliant. There can be conflicts with local codes, new standards, and FHA requirements that create confusion, non-compliance, and possible removal and remediation of non-compliant FHA construction. Generally when there is a conflict between a FHA requirement and applicable local code, the most stringent requirement is required. However there can be conflicts in which neither requirement is more stringent than the other. HUD previously established 10 safe harbors to remedy conflicts. The safe harbor, once selected must be applied to the entire design and construction to establish FHA compliance. Following the requirements of the chosen safe harbor by the entire design and construction team will result in an FHA compliant project.

Fair housing compliance requires accurate, timely information communicated in a non-discriminatory manner. Questions about vacancies, rental policies, property features, amenities, and services can come from various sources, such as walk-ins, telephone, text, email, social media, and advertising. Your best practice to avoid claims of fair housing violations is make sure all staff members  receive proper training on fair housing issues. An effective way to ensure your staff understands fair housing protections is to utilize role-play training exercises to practice compliant responses to inquiries.

As a rental housing provider you must develop your fair housing policy and procedures to comply with the current requirements applicable to federal, state, and local fair housing regulations to reduce your risks of fair housing violations. It is important to note that due diligence for understanding fair housing compliance requirements should also include due diligence for fair housing advertising requirements.

Rental properties, particularly multi-family properties, can receive numerous inquiries on a daily basis regarding the availability of units, rental qualifications, rents, pet policies, or other questions that must be answered in a fair housing compliant manner. When a rental staff member responds to an inquiry, the staff member does so as an agent of the rental housing owner/manager. How the inquiry is answered and the manner in which the response is given must be non-discriminatory, professional and in a manner that does not create a false impression or perception of the rental community and its policies. For example, if a caller inquires about the availability of a two-bedroom unit and is told there is unit availability and schedules a showing, the caller upon visiting the property would expect to be shown a two-bedroom unit. However, if the unit in question was rented immediately after the first inquiry regarding availability, the visitor may perceive he was given false information, perhaps as a pretext for not wanting to rent to him. Any time there is a contradiction in information given by a housing provider or rental staff about rental availability or policies by a housing provider or a staff member, the individual could perceive that there may be housing discrimination issues. A better response to manage this risk to further explain that the information given is accurate only for that specific time. This can be accomplished by using a scripted response such as “a two-bedroom unit is available for showing today but we do not know how long that availability will continue. Someone could view the unit and put down a deposit later today.”

A written prepared script that provides property information such as features, and amenities, updated to current availability of units and fair housing compliant response to commonly asked rental policies can help the staff member respond to questions accurately and consistently in a manner that avoids inadvertent discrimination. Any inquiry from any source must receive the same consistent, accurate, timely response from any staff member who handles the inquiry.

In 2012 and as later amended in 2016, the Department of Housing and Urban Development (HUD) issued the Equal Access Rule that affirmatively stated that housing assisted or insured by HUD must be made available without regard to actual or perceived sexual orientation, gender identity, or marital status. The Rule prohibits inquiries regarding sexual orientation or gender identity for the purpose of determining eligibility or otherwise making housing available and further allows inquiries related to an applicant or occupant’s sex for the limited purpose of determining placement in temporary, emergency shelters with shared bedrooms or bathrooms, or for determining the number of bedrooms to which a household may be entitled.

HUD-funded programs include the Housing Choice Voucher Program (Section 8), public housing, Community Development Block Grants, Housing Opportunities for Persons with AIDS (HOPWA), Supportive Housing for the Elderly and Persons with a Disability and Federal Housing Administration (FHA) insured loans.

Persons who believe they have experienced housing discrimination may be able to pursue a claim under the Equal Access Rule or the Fair Housing Act. Housing providers should note the recent Executive Order that expanded the Fair Housing Act protections against discrimination based on sexual orientation, gender identity, and gender expression in housing and all housing-related transactions.

The 2021 Executive Order 13988 on Preventing and Combating Discrimination on the Basis of Gender Identity or Sexual Orientation directs all federal agencies to interpret protections against discrimination based on sex to include discrimination based on sexual orientation, gender identity, and gender expression. The Order  cites the Supreme Court’s 2020 decision in Bostock v. Clayton County, which found that the prohibition on discrimination “because of sex” in Title VII of the Civil Rights Act of 1964 includes sexual orientation and gender identity.

HUD has announced that it will administer and enforce the Fair Housing Act to prohibit discrimination on the basis of sexual orientation and gender identity. HUD will accept and investigate all jurisdictional complaints of sex discrimination, including discrimination because of gender identity or sexual orientation, and enforce the Fair Housing Act where it finds such discrimination occurred. Specifically HUD will conduct all activities involving the application, interpretation, and enforcement of the Fair Housing Act’s prohibition on sex discrimination consistent with its conclusion that such discrimination includes discrimination because of sexual orientation and gender identity.