Moving into a new home is expensive for most, but for low-income renters, it may be so expensive they can’t move. Along with the first (and sometimes last) month’s rent, application fees, and the cost of the move itself, landlords routinely ask for one to two months’ rent as a security deposit, and sometimes more for those they consider “higher-risk” renters, depending on what local laws allow.
In 2020, the nationwide average rent for a one-bedroom apartment was $1,621. That figure, along with the fact that 40 percent of Americans can’t afford an unexpected $400 expense, makes it easy to see why high security deposits can be a major hurdle for low-income renters.
Sophie House, legal fellow at the NYU Furman Center, says high deposits can make it harder for people to escape homelessness or dangerous living situations, such as a home with an abusive partner. Even if they scrape together the cash to move, keeping thousands of dollars tied up in a security deposit is a burden for low-income renters, and can prevent them from meeting their bills, medical expenses, and other needs.
“Just think about the other values that money could be serving, and the other expense shocks those households could be protected against if they had more cash on hand,” says House.
Security deposits can also be yet another way that being poor is more expensive than being well off. Landlords often ask for higher deposits from renters with incomes below a certain threshold, or those with low credit scores or past evictions.
And though deposits are by definition refundable, there’s no guarantee renters will get that money back, even if they pay their rent and treat the unit well. Too often, unscrupulous property owners treat deposits as their own money rather than their tenants’; a survey of over 1,000 renters and landlords on Porch.com found that 23 percent of renters believed a landlord had kept part of their deposit unfairly at some point, and 24 percent of landlords admitted they had.
Across the United States, and elsewhere in the world, people are experimenting with new approaches to the security deposit problem. Some have been lauded by affordable housing advocates, while others have been met with skepticism and mistrust—often with good reason. Here’s a look at a few commercial, charitable, and legislative solutions being explored.
Tenants who are struggling to come up with money to cover a security deposit may find help from charitable organizations, provided they meet the requirements for aid. Several nonprofits and social services agencies offer assistance with security deposits and other moving expenses, including the Salvation Army, Catholic Charities, and St. Vincent de Paul.
The Housing Trust of Silicon Valley, a San Francisco Bay Area community development financial institution, has a grant program specifically for helping people experiencing homelessness in the area afford security deposits. The Finally Home Deposit Program is funded by the Applied Materials Silicon Valley Turkey Trot, an annual 5K that draws some 10,000 to 15,000 runners. Housing Trust uses its portion of the funds to award one-time grants of up to $2,500 through the deposit program to help people exit homelessness by covering upfront moving costs.
Housing Trust’s chief compliance officer, Craig Mizushima, says they chose this focus after hearing from local social service organizations that deposits were a major challenge that went largely unaddressed in the world of housing assistance. Section 8 vouchers, incredibly hard to come by as they are, do not cover the cost of security deposits in most states. “What they were telling us was that the big gap in that industry is a way to help finance security deposits. And [the renters] just couldn’t save the money,” Mizushima says.
Since its inception in 2015, the Finally Home program has assisted nearly 3,000 individuals and committed $2.8 million in grants. Key to the program’s success, Mizushima says, has been working with a network of partner agencies—who apply on the applicants’ behalf—to help address other factors that may have led to homelessness, rather than simply “applying a Band-aid” with a one-time grant for moving costs.
“Sometimes they’re assisting them with Social Security, or helping them get a job or their GED,” says Mizushima. “There are a lot of approaches to addressing homelessness, beyond having a job and being able to pay the rent.”
While a number of state and local programs across the country provide rental assistance, including help with moving expenses, it’s a patchwork network that leaves many extremely low-income renters uncovered. Where funds do exist, they’re often insufficient. Given the Bay Area’s notoriously sky-high housing costs, and the region’s homelessness crisis, it’s unsurprising that the need for help with deposits in the area far outstrips the supply.
“There are other agencies that provide this kind of assistance, and historically, we all run out of money before the end of the year,” Mizushima says.
Some credit unions are trying to tackle the problem of high security deposits, with varying approaches.
Mass Bay Credit Union now offers a Housing Savings Account for the homeless, in partnership with the Boston Public Health Commission and Friends of Boston’s Homeless. The credit union provides unhoused clients with an account, as well as financial and educational tools, and then all three partners match the amount saved once the participant secures housing, doubling their funds.
‘Just think about the other values that money could be serving, and the other expense shocks those households could be protected against if they had more cash on hand’
In late 2019, Seattle Credit Union began offering unsecured personal loans to renters in need of moving funds, with rates that range from 8.99 percent to 20.99 percent, depending on an applicant’s credit. The highest rate would be paid by an applicant with a credit score below 500, whose only other borrowing option may be a payday lender, the credit union’s CEO told Credit Union Times. Three credit unions in the Portland, Oregon, area started a similar loan program with an advertised rate of 4.99 percent APR.
And a credit union for employees at Harvard University has taken an especially novel approach to the problem, offering a zero percent-interest loan to cover moving expenses as an employee benefit. The Harvard University Employee Credit Union launched its Rental Housing Transition Loan after 2004 contract negotiations between the Harvard Union of Clerical and Technical Workers and the university. Union members can borrow up to $3,500 interest-free to cover upfront moving costs, including security deposits, and then have the payments deducted from their pay over a one-year period.
Of course, being approved for any loan would require renters to meet certain requirements, which could exclude many extremely low-income renters. Borrowers must also be a resident of the appropriate county and possibly a member of the credit union in question (or, in the last example, an employee of Harvard University). But any renter considering a higher-interest borrowing option, such as a credit card loan, or a deposit replacement product with high fees, would do well to check with their local credit union first.
Surety Bonds and the ‘Renter’s Choice’ Campaign
New York City-based startup Rhino has marketed its product as a solution to the problem of high security deposits, and lobbied public officials across the country to pass friendly legislation that would require landlords to accept it. After successfully passing “Renter’s Choice” laws in Cincinnati, Atlanta, and a temporary version in New York state, the campaign hit a stumbling block in Baltimore, after community groups and advocates for tenants and consumers, in part relying on Shelterforce‘s reporting, warned that Rhino’s product could leave renters with large, unexpected bills at move out, and even during the lease.
Rhino’s product, called “security deposit insurance,” replaces the need for an upfront deposit with an ongoing monthly fee, paid by the tenant. While called insurance, the product is actually a surety bond, and doesn’t cover any of the charges for damage that a deposit would normally cover. Renters remain liable for repaying any claims the company pays to their landlord, on top of their ongoing, nonrefundable fees.
Proponents of “Renter’s Choice” laws claim that allowing renters to opt for low-cost “insurance” instead of an upfront deposit makes housing more affordable, and could inject billions currently tied up in escrow accounts back into the economy. Opponents warn that surety bond products can make it harder for tenants to dispute wrongful charges, can mask large liabilities with deceptively low monthly fees, and could help landlords collect on claims (which renters would then have to repay) in the middle of a lease term.
In Baltimore, Mayor Brandon Scott vetoed a “Renter’s Choice” law that had passed the city council 12-to-2, after a months-long outcry from a long list of community groups. “I simply cannot ignore the significant concerns over the security deposit insurance option in the legislation,” Scott said in a statement following the veto, the first of his term.
Two-thirds of the Baltimore City Council would have to vote to override Scott’s veto, a scenario that’s unlikely after the high-profile and contentious fight, according to reporting by Baltimore Brew.
Commercial Non-Surety Bond Solutions
Most commercial deposit alternatives, including those sold by Rhino, Jetty, SureDeposit, and The Guarantors are surety bonds, but not all. While all commercial deposit replacements will cost renters some nonrefundable fees, some products offer greater transparency than others.
Obligo is a credit-based deposit replacement. The company pre-authorizes an agreed-upon amount that can be charged to a renter’s credit card and/or bank account to cover the damage or unpaid rent that a deposit would normally cover, similar to the process of handing over a card upon checking into a hotel.
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The company makes money by charging a fee based on the authorization amount while the service is in place, usually between $5 and $15 per month, according to Obligo CEO Roey Dor. The fee is based on the amount of the deposit and the prospective tenants’ “personal risk profile.” According to the company’s website, high-risk tenants—those with bad credit—may not be eligible. The authorization fee can be paid upfront for an entire lease period, or on an ongoing, monthly basis, and can be paid by the landlord, the tenant, or a combination of both (most often, it’s paid by the tenant, Dor says). For instance, if Obligo charged a renter a $10-a-month fee for a year-long lease, the renter could pay $120 upfront, or $10 for each month of the year. Beyond the lease period, Obligo would be renewed if the renter was signing a new lease. The authorization fee would remain the same.
A company called Realty Medics offers a similar, credit-based option.
A Commercial Installment Plan
A system called DepositCloud allows landlords to replace upfront deposits with installment plans across entire properties. Residents enroll in the service at a participating property and then have the option to either pay the entire deposit upfront, or to pay it off in monthly installments, according to Michael Bowman, a managing partner at the company. Once tenants pay off the deposit, they’re done paying into the system. At the end of the lease, if the landlord does not file any charges with DepositCloud, the renter receives the deposit amount back as a refund, like they would a regular deposit.
The company makes money by charging tenants using the installment plan an enrollment fee at sign-up—usually between $20 and $30, depending on the deposit amount, Bowman says—and a $3-per-month service fee after that. In total, renters pay about 10 percent of the deposit amount in fees to use DepositCloud’s installment plan, while retaining the value of the deposit itself.
Third Party Deposit Holders
One key to making deposits more affordable for low-income renters may lie in taking them out of the hands of landlords entirely. In the UK, property owners have been required to hold their tenants’ deposits in government-approved “tenant deposit schemes” since 2007. These programs are designed to safeguard deposits, and to offer a free third-party resolution service in the event of disputes, meaning tenants no longer have to go to court to fight unfair charges.
Steve Harriott is the group chief executive of the nonprofit Tenancy Deposit Scheme, one of three companies approved in England and Wales to hold rental deposits. He says that since the requirement has been in place, landlords seem to have grown fairer in their deductions, and are more likely to take thorough inventories and accurately document the state of their properties at move-in and move-out. “Over the years, we’ve definitely seen improvements in landlord behavior,” he says.
Now the UK government is considering ways to use these schemes to solve another problem with deposits, that of cash flow. When renters are preparing to move, they have to come up with funds for the new deposit before their old one has been returned. The government has asked Harriott’s group to find a way to make deposits portable from one rental to another. He says they’re exploring installment plans that renters could pay into to cover any potential shortfall between the first and second deposit, due to deductions or a difference in cost. “We’re pretty confident that if we can work with tenants to pay the second deposit by installments, then we can come up with a cost-effective solution to enable that transition to work,” says Harriott.
Despite all their drawbacks, it’s true that security deposits serve a purpose—giving landlords a measure of protection against property damage or lost rent. But there’s a balance to be struck between protecting property owners and placing unnecessary barriers between affordable housing and the renters who need it. And the majority of deposits will never be needed by the landlord. The Porch.com survey found that landlords held back about 36 percent of all deposits on average, a figure that includes any funds that may have been wrongfully withheld.
“It’s clear that it’s an important area for reform, and that there are really good reasons to rethink the model of putting one- or two-months’ rent or more away in an escrow account,” says House, the NYU Furman Center legal fellow.
Whether it comes through capping what landlords can charge, expanding social services, private sector innovation that’s fair to renters, or putting the funds into the hands of a neutral third party, a change to the security deposit status quo could be a significant benefit for low-income tenants.