Tenant Credit Checks : What to Look for

Tenant Credit Checks : What to Look for

As a landlord, you don’t want to deal with a tenant who doesn’t pay rent on time or at all. Eviction can cost anywhere from $3,500 to $10,000, and you’ll be left with a vacant unit that you’ll have to pay for out of pocket. That’s why tenant screening is so important – it helps you protect your investment. Credit checks are an essential part of tenant screening, as they can show you whether a tenant has a history of paying bills on time, how much debt they have, and whether they’re likely to pay rent each month. Keep reading to learn more about why landlords should conduct credit checks, how to do them, and what to look for in the results.

Why run a Tenant Credit Check?

A credit check can provide valuable information about an applicant’s financial health and history. In fact, a survey from Transunion found that 84% of landlords cited payment problems as their top concern. By running a credit check, you can gain insight into a tenant’s debt and credit history and predict whether they’ll be able to afford to live in your rental property and pay rent on time. It’s recommended that you consult with legal counsel familiar with credit reports and tenancy laws before running a credit check.

What to Look for In a Tenant Credit Check

When reviewing a tenant’s credit report, there are several key things landlords should be on the lookout for:

  • A low credit score
  • Late payments
  • Payment gaps
  • A high debt load
  • Derogatory marks
  • Delinquent accounts in rental history

By keeping an eye out for these red flags, landlords can quickly identify potential issues with a tenant’s financial history and make informed decisions about whether or not to offer them a rental.

1. Low Credit Scores

While it may be tempting to automatically rule out an applicant with a low credit score, it’s important to remember that a credit score is just one piece of the puzzle. According to TransUnion, there is no definitive “good” credit score, and many factors contribute to creditworthiness. In a survey, 80% of landlords said they found it important to review a full credit report to understand an applicant’s credit history and context behind their score.

To help landlords make informed decisions, ScreenRenters offers a tool called ResidentScore (Powered by TransUnion). Unlike a generic credit score, which is used to evaluate loan performance, ResidentScore is tailored to the unique needs of landlords, taking into account nearly 1,000 different credit variables that may impact rental outcomes. ResidentScore has been found to predict evictions 15% more accurately than a typical credit score. Additionally, ResidentScore can be used to score all applicants with at least one account on their credit report, making it an especially useful tool for evaluating Millennial and Gen Z renters who may have limited credit history.

ResidentScore is designed specifically to help landlords identify the risk of potential tenants being evicted. This means that landlords can:

  • Choose better tenants, as ResidentScore is more accurate at predicting risk than generic credit scores.
  • Increase their chances of avoiding eviction, as ResidentScore has been found to predict the likelihood of eviction 15% more accurately than other scores.
  • Feel more confident and consider a wider pool of applicants, as ResidentScore can score more applicants with thin credit files.

2. Late Payments

As a landlord, you want tenants who will consistently pay rent on time. If an applicant has a history of making timely payments, it’s more likely that they’ll pay rent on time while living in your property.

If an applicant has repeatedly failed to pay bills like credit card, loan, or utility payments by their due date, it’s possible that they could also have issues paying rent. A credit report can give landlords a comprehensive view of an applicant’s financial history and help determine the risk of nonpayment issues in the future.

3. Payment Gaps

When reviewing a credit report, landlords should look for any gaps in payments on loans, credit cards, and other financial obligations. Credit reports typically show an applicant’s credit history over the past 7 to 10 years. Consistent payment is an important aspect of financial responsibility, as landlords want tenants who will consistently pay rent each month.

4. High Debt

When reviewing a tenant’s credit report, landlords should be on the lookout for significant amounts of debt. A tenant’s debts can affect their ability to pay rent each month. If a prospective tenant has excessive debt, it may make it difficult for them to manage rent along with their other financial obligations. Landlords should also examine a tenant’s income and consider their rent-to-income ratio when evaluating their debt load. Typically, landlords look for tenants who make at least three times the amount of rent as their income.

Good Debt vs. Bad Debt

Keep in mind that many Americans are dealing with high levels of debt across all age groups, so it’s important to consider the type of debt a tenant has and whether it is considered responsible or irresponsible. For example, student loan debt may be viewed favorably, while credit card debt from a department store may be considered irresponsible.

5. Derogatory Remarks

Prospective tenants with derogatory marks on their financial record, such as credit card charge-offs, accounts in collection, car repossessions, and bankruptcies, may indicate a lack of financial responsibility and a potential inability to meet lease terms related to rental payments. It is important to carefully consider the financial history of an applicant before entering into a rental agreement.

6. Delinquent Rental History

A credit check can provide information on an applicant’s rental history, including any reported payment history to a credit bureau and outstanding debts to previous landlords. Delinquent accounts or unpaid rent in an applicant’s rental history may be a cause for concern and indicate a potential failure to pay rent in the future. It is advisable to request a rental history report and conduct landlord reference checks to gain a thorough understanding of an applicant’s past rental behavior. It may also be helpful to seek the advice of legal counsel familiar with credit checks and tenancy laws.

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