“Credit Check For A Prospective Tenant”
Are you protected?
As a property manager, you want to make sure that the properties you are managing are always protected. That is the reason why you do a series of background check before you let a prospective tenant live to your property.
When a prospective tenant fills out the rental application you should have them sign a series of authorizations allowing you to do a complete background check with a credit check.
Doing a credit check can be one of the most important things you have to consider before letting a prospective tenant rent the property you are offering. Understanding the prospective tenant’s financial situation and how they pay their bills will help you insure that they will be able to pay their rent on time throughout the rental contract.
In this article, I will share with you the process of running a credit check to a prospective tenant and explain why it is an important process to complete when renting a property.
Why Is It Important?
Checking a prospective tenant’s credit is a vital part of background check and the search for a good tenant. Since you can’t always judge a book by it’s cover, the credit check allows you to delve deeper into the financial condition and habits of the prospective tenant. If they have a good credit history and pay their bills on time, chances are they will pay their rent on time as well. Keep in mind that credit checks are not foolproof. But they do give you good detail on how someone pays their bills and how much they owe to other financial institutions.
Knowing exactly where a tenant is in their financial situation can only help you in making the determination if you want to rent to that prospective tenant.
What Is In A Credit Check?
A credit check is a report that details the financial commitments and history of how someone pays their bills.
Here is the important information needed when running a credit check:
Personal Information. This should include the prospective tenant’s Name, Current and Past Addresses, date of birth, employer, driver’s license, the name of spouse, and social security number.
Credit History. Lists bank accounts, credit card accounts, and any loans including any mortgages, student loans, etc. The credit history also lists how long the account has been open, the payment pattern over the last two years, the loan amount or credit card limit, and if there are any co-signers.
Public Records. List of any evictions reported, bankruptcies, tax liens or (civil) judgments against the prospective tenant.
Inquiries. Will show the names of those who have requested a credit report on them for the last year.
What Do Property Managers Need To Do Before Running A Credit Check?
As part of the tenant screening process you will have prospective renters fill out a rental application. In the application you should include authorizations on doing a complete background check with a credit check. To get the proper authorizations, you must inform and ask for approval from the prospective tenant that you are going to run a credit check. This is a requirement of the fair credit reporting act. Authorization from the tenant has to be obtained in a written approval with the tenant’s signature on it.
When doing a credit check you also have to verify certain information from the prospective tenant such as:
Prospective Tenant’s Name. Ask to see an ID so you can verify that the name and the face are one in the same. Make a copy of the ID to keep with the application.
Employment History. You can call their current employer to verify their salary and employment status. You should get employer phone number from an independent source like the internet to make sure you are calling the employer and not being misled by the prospective tenant.
Prospective Tenant’s Current Address and Landlord’s Name. Find out if they do live there, and if so, what type of tenant they are and did they pay their rent on time or leave damage to the property when they moved out.
If in any case, they did not give you a consistent information, then you might want to consider declining them to rent to your property. If they lie or misrepresent on their rental application you should consider that they are most likely hiding other things and are not qualified to rent your property.
In running a credit check you can legally ask and receive a fee to complete the rental application process and credit check. Process. Asking for and collecting a fee is a must for you to do. In many states the fee to process a rental and credit application is between $25 to $50. Getting this fee upfront avoids any lost revenue when doing a credit check or additional time to do a complete background check.
How To Analyze The Information You Will Get From The Credit Report
Now that you have completed the process of obtaining all the necessary things required to do a credit check, what exactly will you get to review?
You will normally pay for and receive a credit report generated by one or all three of the major credit bureaus TransUnion, Experian, Equifax. When you receive the credit report you can start analyzing loan and payment history by looking for the late payments, unpaid accounts, bankruptcies, and eviction history.
You should develop a list of important things you need to review when finding the ideal renter. That way when you are reviewing the credit report you can rate and qualify the most important things you are looking for when finding the most qualified renter. Credit reports will show you if the tenant still has debts that may affect their ability to pay rent for your property. Additionally knowing the history of how they pay their other financial responsibilities will help you gage if they will pay their rent on time consistently.
When reviewing a credit check report be sure and review all the information carefully and know what you are looking for in the most qualified renter for you property.
Negative reports or late payments on a credit report allows you to analyze them and if needed discuss and ask the tenant to explain what happened to those negative details on the report. It never hurts to confront the tenant and listen to their explanation.
How To Use The Credit Report
As a property manager you can use the credit report to do financial screening and find out detailed history of how the prospective renter has historically paid their debts.
If you determine not to rent to the tenant due to all the negative items on their credit report, there are certain steps to do for that are based on the Fair Credit Reporting Act.
You must mail an “Adverse Action” letter with an explanation why you declined the tenant because of their credit report. You have to put the exact reasons for the rejection and any other factors that disqualified them from renting your property..
In the Adverse Action letter you are required to disclose and provide the name, address and phone number of the credit reporting agency where you got the report and inform them of their right to request a free copy of their credit report from the agency within 60 days.
Should a Negative Credit Check Always Disqualify a Renter?
A negative credit check and credit report does not always automatically disqualify a renter from consideration.
However, a bad or negative credit check and credit report should immediately make you aware that the person asking to rent from you has had problems in their past of paying bills on time. In most cases, an eviction will automatically disqualify the renter from renting the property.
Often in reviewing and interviewing the prospective renter about the negative reports in their credit check, you can understand past circumstances and possibly want to rent to the tenant even though they had a negative credit history. If the prospective tenant is able to convince you of renting the property to them you should be aware that you are taking a considerable risk and take precautions to avoid losing money on unpaid rent or property damage.
In these cases you can ask for a larger security deposit. You should also be ultra sensitive to late rent and post evictions notices timely to avoid unpaid rent.
Be aware if renting to someone with negative credit history you are taking a chance most property managers will not take.
Final Thoughts About Conducting A Credit Check On A Prospective Tenant
When reviewing a credit check report for you prospective tenants you must be able to understand and apply your rental standards fairly when determining the most qualified tenant you want to rent the property.
Understanding and evaluating credit check reports is the best way to know if your tenants will pay rent on time.
I hope this article has clarified some of the issues and possible outcomes when reviewing a credit report on a prospective tenant.
Disclaimer: This commentary is a matter of opinion provided for general information purposes only and is not intended to be taken as investment or trading advice under any circumstances. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses any person may incur as a result of this analysis. Individuals should consult with their personal financial advisers. By using this web site or any information contained in it, the user specifically and expressly agrees that no advisor-client relationship is created between said user and any author, owner, executive, or principal of this web site by either use of this web site, or by any information, product, or service offered by or on this web site. No express or implied guarantees or warranties as to investment or trading results are made, and any perceived insinuations of such are hereby expressly disclaimed.