I got a message last week that caught my attention:
“How do you get someone in a house with bad credit and fixed income?”
My first thought was… I generally open the front door.
Kidding aside, this is actually a great question that touches on something many landlords & property owners struggle with…
When someone has bad credit, should you take a chance on them? And if so, under what conditions?
Let me share my approach after 25 years in real estate.
The Bankruptcy Paradox
Here’s a scenario I want you to consider:
You’ve got a rental property. A potential tenant applies.
Their credit score is terrible because they recently filed for bankruptcy. The bankruptcy has been discharged, meaning they’ve gone through the process and are starting fresh.
Would you rent to this person?
Most landlords immediately say “no way.” But I’d say yes — and here’s why.
Someone who has recently gone through bankruptcy has had all their debts wiped clean. This means they suddenly have a significantly greater portion of their income available for housing.
Think about it… what typically drives people to bankruptcy?
It’s rarely their housing payment. It’s usually the accumulation of consumer debt — credit cards, car loans, medical bills — that creates financial quicksand they can’t escape from.
After bankruptcy, they have a clean slate.
And you know what they’re 100% committed to not experiencing again?
The stress of housing insecurity.
The Psychology of Post-Bankruptcy Tenants
Here’s what most landlords miss: post-bankruptcy tenants often become your most reliable payers.
Why?
Because they know what it feels like to be financially overwhelmed, and they never want to go back there.
You know what bill they pay first every month? Their rent — because they don’t want the stress of thinking they’ll be out on the streets again.
I’ve rented to people in this situation many times, and they’ve consistently been excellent tenants who prioritize their housing payment above all else.
Bad Credit That’s Not Bankruptcy
Now, what about someone with bad credit for other reasons?
This requires more investigation…
If their credit is poor because they’re chronically late on payments, I need to understand why:
- Is it because they genuinely don’t have enough money? (income problem)
- Or is it because they have poor financial management skills? (behavior problem)
These are two very different situations requiring different approaches.
If it’s an income problem, and they simply can’t afford the rent, there’s not much I can do. The math has to work.
But if it’s a behavior problem — they have the money but are disorganized or careless with payments — that’s something I might work with under the right conditions.
The Down Payment Factor
Here’s something fascinating I’ve discovered over the years about owner financing (which applies to rental situations too):
The default rate drops exponentially when someone puts down 10% or more.
Below 10% down payment, the default rate is high. At 10%, it starts to decline. By 20% down, the default rate plummets dramatically.
Why?
Because common sense — people have a natural incentive to protect what they’ve invested in.
The more skin they have in the game, the more committed they are to making it work.
My Practical Approach
So here’s how I handle bad credit situations:
For Post-Bankruptcy Applicants:
- I’ll generally approve them if the bankruptcy is discharged.
- I verify their income is sufficient for the rent (typically 3x monthly rent).
- I might require a slightly larger security deposit where legally permitted.
For Other Bad Credit Situations:
- I investigate the reason behind the bad credit.
- If it’s poor money management (not lack of funds), I might approve with conditions.
- I typically require a larger security deposit (where legal).
- For extremely poor credit, I might ask for 1-2 months’ additional deposit.
The Fixed Income Question
Catherine also asked about fixed income, which is a separate consideration.
Fixed income itself isn’t a problem — many retirees make excellent tenants. The question is simply whether the fixed income is sufficient to cover the rent comfortably.
I use the same income qualification standards: Can they afford it?
If yes, fixed income can actually be more stable than employment income, which could end unexpectedly.
Wrapping It Up
The conventional wisdom says “never rent to someone with bad credit.” But like most conventional wisdom in real estate investing, there’s money to be made by thinking more deeply.
Bad credit doesn’t always mean a bad tenant.
Sometimes it means they’ve learned hard lessons that make them more financially responsible going forward.
The key is understanding the story behind the credit score, not just the number itself.
So next time you’re reviewing a rental application with bad credit, ask yourself:
- Is this bad credit from a discharged bankruptcy?
- And is it a money problem or a management problem?
Most importantly — can I structure the agreement to protect myself while giving them a chance?
Sometimes your best tenants are the ones everyone else turned away.
Take care,
Rob