It is the first of the month, and you, the landlord, expect to have those rent checks coming in on time. Better yet, you expect that when they are deposited into your operating account, they won’t bounce. After all, you no doubt have a mortgage to pay, payroll to meet, and operating costs to keep things up and running to your residents’ satisfaction. By golly, you might even expect to make a profit, you clever person, you!

But sometimes it just doesn’t go as expected (as if you had to read this article to learn that!), and those checks don’t come in or they bounce sky-high because some of your residents are unable to pay their rent. In order to minimize this risk, our industry has established some protocols that have become standards in qualifying prospects and approving their applications. [In deference to Nan Cavarretta, a well-known fair housing instructor and property management professional, please note that we approve or disapprove applications (paperwork); we do not approve or disapprove of applicants (people).]

Two of the important standards are income-related. The first standard has to do with what actually counts as income; you may have heard this referred to as “source of income.” The second has to do with just how much income is enough income to satisfy the landlord. Let’s look at these more closely.

Source of Income

This criterion has certainly evolved through the years. Once upon a time, for mortgages or rent, the woman’s income didn’t count in the calculation. After all, she was likely to get pregnant, lose her job, and not have that money, so her income was deemed to be tenuous at best. While we scoff at such a position today, we are still establishing standards that future generations of landlords may look back on and shake their heads. There are landlords today who still require that “income” be employment-related (i.e., a paycheck). They refuse to consider other lawful income that an individual may have, including child support, alimony, interest or investment income, or welfare.

While this may be a lawful position to take in many areas, more and more States (such as California, Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, North Dakota, Oklahoma, Oregon, Utah, Vermont, and Wisconsin) and local governments (such as the District of Columbia, Chicago, Howard and Montgomery Counties, MD, Philadelphia, Seattle, and King County, WA) have declared “source of income” to be a protected class for fair housing purposes. That means if your community is located in these jurisdictions, then you must include all lawful sources of income in your qualifying calculations. But it may mean even more. Depending on the language of your state or local law, or depending on how your courts may have ruled on the issue, you may find that you are now required to consider Section 8 vouchers in qualifying the applicant’s credit and must accept the voucher holder/applicant whose income plus voucher assistance meets your credit standards. In such jurisdictions, for you this federal program is no longer “voluntary.”

You owe it to yourself to find out just what the status is for the location of your property. And keep in mind that if you are a landlord with communities in different areas, you may need to advise your staff of the differences. “No, we don’t take Section 8” may be perfectly fine for one community and an unlawful statement at another.

 

Rent-to-Income Ratios

It is a well-established standard in our industry to require applicants to have a certain amount of income on a “take-home” basis as relates to the rent charges (usually exclusive of utilities). Generally we see such relationship based on a ratio of 2:1 to 3:1. Yet as prevalent as this practice may be, it may present problems in the future. The mortgage lending industry (which is, of course, also subject to fair housing laws) has in the past undergone challenge and scrutiny that resulted in a significant revamping of its screening and underwriting policies and procedures. The question is, would the multifamily “industry standards” pass muster in a fair housing challenge?

Many advocates for minority groups and for the disabled community argue that the rent-to-income ratios do not take into consideration one’s true ability to pay the rent. For example, a minority single mother once said she was willing to sacrifice in many ways (including feeding her children beans and rice every night) in order to put more of her dollars into rent at a community that offered better conditions and better schools than did apartment communities where she could meet the ratio standard. And the disabled will argue that while they may not pass the rent-to-income “test,” they also do not have many of the common expenses that the non-disabled (or TABs – “Temporarily Able-Bodied” persons) have. Often those with disabilities will use public transportation and not have automobiles with the related costs of tag, taxes, gasoline, insurance, weather related damage, maintenance, and the like. And those with disabilities often qualify for “Meals on Wheels” and other programs that do not provide “income” but that offset their expenses, making it possible for them to use more of their disposable income for rent. Some non-profit organizations will offer to serve as a guarantor or surety to enhance the creditworthiness of an applicant with a high rent-to-income ratio. Be sure your leasing agents and applicants understand and apply correctly your company’s policies toward applicants with marginal credit histories who apply with a guarantor or surety.

Thus, the wise landlord, and our industry as a whole, may want to consider alternative ways for evaluating and approving applications. Landlords may have a genuine business interest in creating standards, including rent-to-income ratios. However, a HUD memo suggests that if there is a less discriminatory way by which the genuine business necessities may be addressed, landlords should adopt such less discriminatory alternatives.

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It is important to remember that the bottom line is, in fact, the bottom line. This is all about making some sort of educated guess (and it is only a guess, as your eviction lawyers can tell you!) about a prospect’s ability to pay. Some of the alternatives to consider might be:

  • Does the prospect have a good credit rating, indicating that whatever her income may be, she has managed her money well in the past? If so, she is not likely to sully her credit record with non-payment of rent.
  • Can the prospect show that he has paid comparable rent in full and on time in the past? If so, then chances are, your rent will be paid as well.
  • Does the prospect have assets in savings?
  • Does the prospect have a disability? It may be a reasonable accommodation to relax the rent-to-income ratio, particularly if it is a “borderline” situation.
  • Does the prospect have someone who would be willing to guarantee the lease and who meets the landlord’s criteria? In this case, the landlord then has someone who is fully obligated and arguably able to pay. (And if the guarantor is for someone with a disability, this may be required as a reasonable accommodation.)
  • Has the landlord considered factors that may allow a prospect to devote a higher percentage of disposable income to rent (such as the examples discussed above)?

If landlords have under-representation of minority residents, as compared to the metro population, or if there is disparity in the acceptance rates as to applications of minorities and non-minorities, then a written policy and procedure to implement some of the above ideas may be the prudent thing to do. Consider it part of a risk-management plan—because you don’t want to be the rent-to-income test case, do you? And you really do want everyone to have the opportunity to be a rent-paying resident, don’t you?

Nadine Green is Senior Counsel with For Rent Magazine®. The information contained in this article is not to be considered legal advice, and the author and FRM strongly recommend that you consult with your own counsel as to any fair housing questions or problems you may have.