CLP Credit and Financial Analysis 3 — Questions and Answers
Question 1: A rental applicant has a FICO score of 580. Under a tiered-approval system, this score would most commonly result in:
- Standard approval with no conditions
- Conditional approval, such as an increased security deposit (Correct answer)
- Automatic approval under the Fair Housing Act
- Permanent lifetime ban from the property
Correct answer: Conditional approval, such as an increased security deposit
Many properties use tiered criteria where lower scores trigger conditional approval with additional financial requirements rather than automatic denial.
Question 2: When calculating income-to-rent ratio, a property requiring 3x the monthly rent means an applicant for a $1,400/month apartment must earn at least:
- $2,800 per month
- $3,600 per month
- $4,200 per month (Correct answer)
- $5,600 per month
Correct answer: $4,200 per month
$1,400 × 3 = $4,200; the applicant must demonstrate monthly gross income of at least this amount.
Question 3: Which federal law requires landlords to provide adverse action notices when denying an application based on information in a credit report?
- Fair Housing Act (FHA)
- Fair Credit Reporting Act (FCRA) (Correct answer)
- Equal Credit Opportunity Act (ECOA)
- Americans with Disabilities Act (ADA)
Correct answer: Fair Credit Reporting Act (FCRA)
The FCRA mandates that any adverse action based on a consumer report triggers a written notice informing the applicant of the source and their right to dispute.
Question 4: A collection account labeled 'medical' on a credit report is significant to a leasing professional primarily because:
- Medical collections are always disqualifying under federal regulations
- Newer FICO models may exclude or reduce the weight of medical collections (Correct answer)
- Medical collections automatically convert to judgments after 90 days
- Medical debt is excluded from all credit reports by law
Correct answer: Newer FICO models may exclude or reduce the weight of medical collections
Recent FICO and VantageScore updates have reduced or eliminated the scoring impact of medical collections, making context important when reviewing reports.
Question 5: An applicant's rental history shows two NSF (non-sufficient funds) returns on rent checks within the past 12 months. This is most relevant to the credit analysis because it indicates:
- The applicant likely has poor cash-flow management relative to rent obligations (Correct answer)
- NSF returns are legally irrelevant to residential leasing decisions
- The applicant is protected from adverse action under the FCRA
- The prior landlord must have made an error in presenting the checks
Correct answer: The applicant likely has poor cash-flow management relative to rent obligations
NSF returns on rent checks directly signal cash-flow problems and inconsistent ability to meet recurring housing obligations.
Question 6: Which financial metric best measures a property's ability to cover its debt service from operating income?
- Gross Rent Multiplier (GRM)
- Debt Service Coverage Ratio (DSCR) (Correct answer)
- Capitalization Rate (Cap Rate)
- Operating Expense Ratio (OER)
Correct answer: Debt Service Coverage Ratio (DSCR)
DSCR = Net Operating Income ÷ Annual Debt Service; a ratio above 1.0 indicates the property generates enough income to cover its loan payments.
Question 7: A prospective commercial tenant submits two years of business financials showing a current ratio of 0.8. This most likely indicates:
- The business has strong liquidity with ample cash reserves
- The business has more current liabilities than current assets, a liquidity concern (Correct answer)
- The business is highly profitable based on revenue growth
- The ratio is ideal and signals no financial risk
Correct answer: The business has more current liabilities than current assets, a liquidity concern
A current ratio below 1.0 means current liabilities exceed current assets, signaling potential difficulty meeting short-term obligations.
CLP Credit and Financial Analysis 3
A rental applicant has a FICO score of 580.
Under a tiered-approval system, this score would most commonly result in: