Every landlord desires tenants that pay rent timely. That’s why most landlords pull credit reports to evaluate a potential renters’ ability to pay their rent. In addition, credit reports contain vital information about applicants’ financial circumstances. As a result, they can assist landlords in selecting the right tenants from the start. Choosing good tenants is critical because poor decisions can result in having to evict a tenant, which can be disruptive, costly, and time-consuming.
As a landlord, it is crucial to understand the fundamentals of credit reports, including where to obtain them and the information the reports contain. Landlords must also follow the laws that govern tenants’ credit information use.
Why are Credit Checks Necessary for Landlords?
A credit check is an integral piece of the tenant screening process for all prospective tenants. These reports provide insight into a person’s financial situation, to include their current debt and history of bill payments. Credit reports are based on the assumption that individuals who have previously met their financial obligations will likely continue to meet them.
Landlords are required by federal law to follow the guidelines outlined in the Fair Housing Act. This act prohibits all discrimination when renting or selling a property. As a landlord, you are obligated to treat your tenants fairly. Additionally, you are not allowed to discriminate based on gender, race, religion, or other legally defined factors.
Credit checks help determine applicants’ ability to pay their rent; however, they are only one piece of finding good tenants. Additional screenings to consider are background checks and criminal history checks.
What Information Do Landlords Require From Tenants?
If you want to speed up the process for credit checks, it is vital to collect all of the necessary information from prospective renters at the time of application for your rental.
Tenant Application
The tenant rental application is the primary tool for gathering information about potential tenants. A thorough application will help eliminate unqualified candidates, allowing you to focus on the best candidates for your properties. A tenant application should also include the information required to run a credit report. Some of the basic information a landlord should include in an application is:
- Full name
- Current address
- SSN
- Birth date
- Driver’s license number
- Data on employment and earnings
- Cohabitants’ names
- History of residence, including eviction information
- Criminal history
- Pets
- Vehicle information
- Smoker status
Permission to Run Credit and Background Checks
Landlords can run credit reports and background checks when they have a legal reason to do so under the Fair Credit Reporting Act. The law does not require permission from a prospective tenant for a landlord to order this type of information. Nonetheless, requesting permission shows the landlord has a legal purpose in asking for consent on the rental application. In addition, landlords must certify to the reporting entity that they are using the information to solely screen an individual for consideration in renting their property. It is important to note that in some states, laws on using these types of reports are more strict than federal laws. As a landlord, it is crucial to understand how the laws in your state work.
What Is the Cost of a Credit Report?
Credit reporting costs vary based on the provider and the information included in the report. Experian, for example, charges $14.95 for basic credit reporting a FICO credit score. If you are going through Transunion, their SmartCheck Basic comes in at $25 and includes a criminal background check and a proprietary score, developed by Transunion, called a Credit-Based ResidentScore. RentPrep charges $38 for a full credit report, background check, and their proprietary ResidentScore.
Landlords can charge prospective tenants for a credit check and additional screening reports; however, it is a good idea to check your tenant-landlord laws. In addition, the state you reside in may have charge limits.
What Should You be Looking for on a Credit Report
When reviewing credit reports for prospective tenants, keep the following points in mind:
Credit Score
FICO and Vantage credit scores have a credit range between 250 and 900; however, the average scores you will see are 300 to 850. A person’s credit score is a good indicator of financial health; however, it isn’t the whole picture. If a prospective tenant has a low credit score, it is crucial to read the entire report to understand why the score is low.
Debt Load
A prospective renter that is heavily in debt may not be able to make their rent payments timely each month. Consider the applicant’s rent-to-income ratio (RTI). You can calculate RTI by dividing the prospect’s monthly rent by their gross monthly income. Some landlords adhere to a rule known as the 30% rule. This rule states tenants’ rent should be a maximum of 30% of their gross monthly income. For example, a prospective tenant’s gross monthly income is $5,000. In this case, the 30% rule says the prospective tenant can afford a maximum of $1,500 for their monthly rent.
Late Payments
If tenants haven’t paid their credit card or other bills, they likely won’t pay their rent on time either.
Credit Inquiries
A credit report shows “hard” inquiries from lenders, indicating that the prospective tenant has applied for a credit card or a loan. New credit cards or loans may increase their debt load.
Delinquent Rent Payments
An applicant is unlikely to pay rent on time if they have previously failed to pay rent timely to previous landlords. However, there may be circumstances you do not know of that caused the delinquent rent payments.
Negative Information
Bankruptcies, garnishments, liens, car repossessions, collections, and other finance issues are indicators that the applicant may have financial difficulties.
What Should You Do If an Applicant Has Poor Credit?
Assume you’ve reviewed the applicant’s credit report and decided to turn them down. Federal law requires you to notify the applicant and provide them with the reason for rejecting their application.
You should not automatically reject an applicant with a low credit score. Instead, look for the reasons for the low score. For example, the applicant may have significant medical bills or expenses related to an accident, causing their credit score to be lower. On the other hand, a good rental history and a stable income may outweigh a poor credit score.
Additionally, by law, you are required to give the applicants the contact information for the credit reporting company and inform them of their rights to dispute the data on the report. You must also inform them that you and not the credit reporting company made the decision to reject them.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
