In today’s competitive rental market, finding reliable tenants is more important than ever for property owners. This is where credit screening comes into play. But what exactly is credit screening, and why should you, as a landlord, care about it?
Credit screening goes beyond just looking at an applicant’s credit score. It delves into their financial history, revealing patterns and behaviors that can predict their future reliability as tenants. With rental delinquency rates averaging around 5% nationwide, according to the U.S. Census Bureau, understanding a tenant’s creditworthiness through screening can significantly reduce your risk of late payments and evictions.
For example, when multiple rental applications come in for your property, how do you choose the best tenant? A comprehensive credit screening offers insights into an applicant’s past handling of debt, bill-paying habits, and income stability. This data-driven process helps to make informed leasing decisions, protecting your rental investment and ensuring a consistent rental income.
As we explore credit screening in more depth, we’ll cover what it involves, how to interpret the results, and best practices for incorporating this important process into your tenant selection strategy. By the end of this article, you will have a clear picture of how credit checks can strengthen your property management through enhanced tenant screening, delivering increased protection and financial security.
What is the Definition of Credit Screening
In simple terms, credit screening is the process of checking a rental applicant’s credit history or credit report to review how they have managed finances and debt in the past. It’s an important evaluation tool that can provide insights into an applicant’s reliability, responsibilities, and risk level as a tenant.
A tenant’s credit report contains details from their financial history collected by credit bureaus like Equifax, Experian, and TransUnion. It shows if they pay bills on time, how much credit they use, and how much debt they currently have. By screening credit, landlords aim to determine the likelihood that an applicant will fulfill their lease obligations and pay rent on schedule each month.
What Does a Credit Screening Entail
A credit screening aims to build a clear picture of the reliability, responsibility and suitability of prospective tenants through an analysis of their credit history and other relevant data. This process mostly involves:
- Pulling a Credit Report: This report contains information about an applicant’s borrowing and repayment habits, including details on accounts like credit cards, auto loans, student loans, and mortgages. Landlords can request reports from the three major credit bureaus: Equifax, Experian, and TransUnion.
- Checking the Credit Score: Credit scores summarize an individual’s creditworthiness on a scale of 300-900, with higher scores mainly indicating a lower likelihood of missed payments. Most landlords look for scores above 650.
- Verifying Employment History: This step aims to confirm the applicant has a stable income source to consistently pay monthly rent. You can contact current or past employers for verification.
- Landlord Reference Checks: Contacting previous landlords helps landlords understand the applicant’s past rental history, including their punctuality with rent payments and adherence to lease agreements. Poor references from previous landlords are a red flag. Get to know how to write recommendation letter for a tenant.
- Background/Criminal Checks: In some cases, landlords also screen for criminal convictions, but it’s important to comply with local fair housing laws regarding the types of offenses considered and how they are used in the screening process.
Why is Credit Screening Critical for Landlords
Credit screening is a crucial step in the tenant selection process helping you to minimize financial risks and establish a foundation for a positive landlord-tenant relationship. Here are some reasons why checking tenant credit is a necessary step in most rental approval processes:
Reveals Payment History: A credit report shows how reliably applicants have managed previous financial obligations like credit cards, loans, utilities, and rent payments. Late or missing payments signal potential difficulties with future rent payments.
Forecasts Future Actions: Overall credit history and score give insight into an individual’s financial responsibility and likelihood of honoring lease agreements. Individuals with a history of neglecting financial commitments pose a higher risk.
Reduces Risk of Rental Default: Credit screening helps identify applicants who attempt to conceal poor credit or rental history, potentially leading to rent defaults and evictions. Tenants with good credit mostly demonstrate greater financial responsibility.
Complies with Fair Housing Laws: Conducting credit checks for all applicants, regardless of protected characteristics like race or familial status, ensures compliance with fair housing and anti-discrimination laws. This protects landlords from potential discrimination claims.
Legally Advisable: Proper tenant screening protects landlords in case of tenant-related issues like damage or non-payment of rent. Screening serves as “due diligence” protection for any legal disputes that arise during a tenancy.
How to Determine the Best Credit Score for Your Tenant
To determine the best credit score for your tenant, consider the following factors when evaluating their creditworthiness:
- Credit Score and Report: A credit score above 670 is generally considered suitable for most rentals, with landlords often looking for scores between 600-650. Having a high credit score and a clean credit report indicates a lower risk of default.
- Income and Employment: Ensure the tenant has a stable income at least three times the rent amount. Verify income through pay stubs, tax returns, or bank statements. Steady employment suggests a reliable income source to cover rent consistently.
- Rental History and References: Check how the tenant behaved in previous rentals, including payment history, property maintenance, and relationships with landlords and neighbors. A positive rental history indicates a trustworthy tenant.
- Debt-to-Income Ratio: Consider the tenant’s monthly income percentage for debt payments. A lower ratio indicates more disposable income.
- Personal and Professional Background: Understand the tenant’s personality, lifestyle, values, skills, qualifications, and achievements to assess their reliability as a long-term tenant.
How to Conduct an Effective Credit Screening Process
Here’s a step-by-step guide to conducting a responsible and legal credit screening process:
Step 1: Obtain Written Consent: Before running a credit check, always obtain written permission from the applicant. If they agree, you can include a clause in your rental application form that authorizes you to access the applicant’s credit information. This consent should clearly state your intention for this process.
Step 2: Collect Applicant Information: Get all the necessary information from the applicant, such as their name, date of birth, social security number, and current address. This information is needed to request their credit report from the credit bureau.
Step 3: Choose a Credit Reporting Agency: Select a reputable agency to obtain your potential tenant’s credit report. Ensure the agency complies with all relevant laws and regulations, including the Fair Credit Reporting Act (FCRA), and provides accurate and up-to-date information.
Step 4: Request the Credit Report: Submit the applicant’s information to the chosen credit reporting agency and request a credit report. This report will provide valuable insights into the applicant’s credit history, including payment patterns, outstanding debts, and negative marks.
Step 5: Review the Credit Report: After receiving the credit reports, carefully review them to assess the applicant’s financial responsibility. Look for consistent on-time payments and low debt-to-income ratios. While negative marks like late payments or collections raise concerns, consider the overall context and avoid relying solely on one factor.
Step 6: Evaluate the Applicant: Based on the information obtained from the credit report, evaluate the applicant’s financial responsibility and ability to meet their rental obligations. Consider their income, employment stability, and other supporting documents.
Step 7: Make an Informed Decision: Use the information gathered during the credit screening process to decide whether to approve or reject the applicant’s rental application. Considering the overall financial picture is crucial instead of solely relying on the credit score. At last, your decision-making process should comply with fair housing laws and avoid any form of discrimination.
Also Read: How to check for eviction records.
What to Look For on a Tenant Credit Report
When evaluating an application, here are some of the key components to examine on an applicant’s merged credit report:
Payment History: Late or missed loan, credit card, collection or public record payments in the last 2 years indicate higher risk. Consider causes of delinquencies.
Open Accounts: Number and types of open revolving credit accounts (credit cards, lines of credit) used versus available credit. Higher balances raise potential default risk.
Debts Owed: Total amount of outstanding debt obligations from various sources like loans, collections, charge-offs, etc. Too much outstanding relative to income is a red flag.
Bankruptcy/Judgments: Any bankruptcies, liens or civil judgments on record from prior unpaid debts are major negatives. Understand circumstances and dates.
Inquiries: Number of recent “hard” credit checks (loan or credit card applications) suggesting potential over-extension or financial difficulties.
Credit Age/Mix: A history of managing different types of credit (revolving, installment, mortgages, etc.) over time builds a stronger, stable credit profile desirable for renters.
Collections: Unpaid collection, charged-off, past due, or late payment markings are negatives. Look into settlement or payment activities.
What are the Legal Considerations for Landlords
Failing to comply with applicable laws when conducting tenant credit screening involves legal complications. Here are the most important legal considerations you should be aware of:
Fair Credit Reporting Act (FCRA): The FCRA regulates the collection, dissemination, and use of consumer credit information. You must comply with the FCRA when conducting credit screenings. This includes obtaining written consent from the tenant, providing them with a copy of the credit report if adverse action is taken based on the report, and following proper procedures for handling and disposing of sensitive information.
Equal Opportunity Housing: When conducting credit screenings, you must ensure you are not engaging in discriminatory practices. The Fair Housing Act prohibits discrimination based on race, color, religion, sex, national origin, familial status, or disability. Make sure that your credit screening process is applied consistently to all applicants and does not discriminate against any protected classes.
State and Local Laws: Besides federal laws, state and local laws can also govern credit screening practices for landlords. Familiarize yourself with the laws in your jurisdiction to ensure that you comply with all applicable regulations.
What Do You Do In the Event of a Negative Credit Report
Here are the main options you have for a tenant with a negative credit report:
- Request a higher security deposit for added financial protection.
- Ask for a co-signer with excellent credit to back up rent payments.
- Approve if the tenant agrees to pay renter’s insurance to cover property damage.
- Consider stability signs like a steady job and no late rents that may offset some credit issues.
- Approve automatically deducting rent monthly from the tenant’s bank to ensure on-time payments.
- Deny but provide feedback on improving credit over time for future reapplication once scores increase.
- Weigh circumstances around past negatives like medical debts or if bankruptcy is far in the past.
What are the Mistakes to Avoid During Tenant Credit Screening
It’s also wise to watch out for these common credit screening errors that could introduce risk or legal issues:
- Not ordering reports from all three bureaus, which could miss data from one source
- Relying solely on credit and neglecting income verification documents
- Failing to get proper written authorization from all adult applicants
- Making a final decision without consulting approved criteria/guidelines
- Not storing all records and correspondence securely for the required period
- Rejecting applicants due to factors like race and family status against fair housing law
- Overlooking red flags or refusing reasonable accommodation requests
- Not informing denied candidates of their right to get a free report dispute
- Using credit as the only factor without considering positive application details
- Failing to re-check an applicant’s information if a significant time has passed.
Conclusion
Credit screening is a necessary and valuable part of your tenant selection process. It ensures transparency and builds trust between you and potential renters, establishing a successful landlord-tenant relationship. For expert guidance on implementing effective tenant screening practices, consult with OKC Home Realty Services. Our team can provide you with the insights and support needed to protect your investment and maintain a hassle-free rental experience.
Credit Screening FAQs
Can landlords check credit without permission?
No. Landlords must disclose to applicants and obtain their written permission before conducting credit screening. Doing so without consent violates state and federal laws.
What if an applicant refuses checks?
You have no obligation to rent without proper credit screening. Insisting on credit checks even for strong applicants protects against potential future issues.
Can I deny someone solely based on credit?
No, but you can evaluate reports objectively per your criteria and rental history requirements. Credit is just one factor in screening.
What elements must I disclose to rejected applicants?
You must provide the applicant's name, address of screening company used, and a means to obtain a free copy of their report if credit was a denial factor.
How should I document my screening practices?
Keep signed applications, credit check reports, screening criteria used, notes from applicant conversations, and other relevant lease paperwork for at least one year after a tenancy ends.
Can tenants dispute inaccurate information on my credit report?
Yes, all tenants have the right under the FCRA to dispute any incorrect or incomplete information on their credit report by contacting the credit bureau.
Can I Reject Applicants Based Solely on Credit Score?
No, the Fair Credit Reporting Act requires landlords to do an individualized assessment considering all application factors. A low score alone may not be grounds for rejection if other positive qualifications offset it.
