Wondering how to evaluate a credit report properly?
In addition to a credit report, what else do you need to know about a potential tenant?
Here is what you need to evaluate and where to get that information.
- Income – Ask applicant(s) for proof of income.
- Credit Report- You can get this from any good tenant screening service.
- Collections – Collections are listed on the credit report.
- Rental History – Use this form and fax or email to the tenants’ previous landlords or just call them. Property management companies and apartment communities require a written authorization in order to release this information
- Employment History – Use an employment verification form and email or fax it to their employer.
- Prior Evictions – Most screening services offer an Eviction Report.
- Bankruptcy – If the bankruptcy is discharged it will be listed in the credit report. If it’s not you can search your local courthouse files.
- Lawsuits – Search Clerk of Court records under the applicant’s name.
- Criminal Activity – You can get a Criminal Background check from a screening company or search the local court records.
A potential tenant should be making enough to pay the rent comfortably. If tenants are stretched to pay their rent, they can become demanding and destructive in some instances.
A good rule of thumb: income should be equal to three time rent. For example, if the monthly rent is $2,000, the tenant monthly income should be $6,000.
What documents should you request to verify the tenant’s income?
These are documents we accept as proof of income: W-2 – Income Statement, 1099-Misc, IRS 1040, Social Security Statement, Pay Stub, Bank Statements (three months if self-employed), Annuity Statement, 1099-R, Workman’s Compensation Letter.
The credit score is part of the credit report that you get from screening services. It gives you a complete picture of a potential tenant’s financial health.
TransUnion did a study that showed the strong correlation between credit score and eviction rate.
“The eviction rate for consumers included in the study who had a score between 650 and 749 was only 0.3% while this percentage rose dramatically to 12.3% for those consumers with a score of between 350 and 449.”
The most important things that affect a credit score are:
- Payment history – do they pay their bills on time
- Credit utilization – how much of their available credit they have used. If most of their available credit is used, they may be stretched financially.
- Credit history length – how long their account have been open
- The mix of credit accounts – how a tenant manages different types of credit accounts.
- New credit – too many new accounts and inquiries can indicate cash flow problems.
Collections from utility companies, apartment communities and property managers is one of the reasons for immediate denial of application.
If someone still owes money to their previous landlord, most likely the same will happen again.
There are four things that I look for when examining the tenant rental history.
- Did they pay on time? I call previous landlords for references
- Did they cause damage?
- How long did they stay in one place? The exception is military families or someone whose job requires them to move often.
- What are their plans for the future? Getting a long term tenant is crucial for good cash flow.
I normally request a W2-Income Statement from tenants as proof of income and I fax or email the Employment Verification to their employer to make sure that they are still employed.
I prefer tenants with job stability, more than two years at the same company.
I always get an eviction report from my screening service. If I see an eviction in the last seven years, the application is denied automatically.
Bankruptcy is not a reason for automatic denial as long as it’s discharged. In fact, some of my best long term tenants had a recent bankruptcy. As long as there is a good reason for it, they have the income and recent credit history shows responsible behavior with new credit.
Checking for lawsuits with previous landlords is a good way to avoid “professional tenants” , tenants who know how the system works and use it to defraud unsuspecting landlords.
Unfortunately, the only way to check for lawsuits is to search the Clerk of Court website under your tenant’s name.
Most tenant screening services offer a criminal background check which includes sex offenders and most wanted lists. If your rental is in Delaware, Hawaii, Kentucky, Massachusetts, South Dakota and Wyoming the instant criminal results may not be available from the screening services. The reason for this is the many false positives.
Read this HUD guidance that addresses how tenants with criminal records should be treated.
Here are the main points:
- Arrest should not be the reason for application denial because you can be arrested without being guilty
- You can’t deny an application solely because someone has a criminal record unless they pose “ a demonstrable risk to resident safety”
All of this may sound overwhelming to a new landlord but screening applicants well is the most important task to ensure having good tenants who value your property and pay on time.