Whether you are renting your rental property out for 1 month or a year as a property manager or homeowner, you're essentially loaning your most valuable asset — real estate — to someone you probably have never met before: a new tenant. That's why it's crucial to make sure that you pick the best renters and conduct a proper screening process to fill your vacancies.
Verifying employment and checking landlord references is important, but you may find that the fastest way to separate good tenants from bad ones is to run a credit and background check after receiving their rental application.
Many tenant screening services exist, so we came up with a list of the three most important things you should look for when screening tenants during the application process.
In a credit check, look at more than just the potential tenant's credit score.
Often, landlords will screen tenants by relying heavily on a rental applicant’s credit score to determine whether or not they will be financially responsible tenants. What actually may be more relevant than a credit check is the most recent payment history and total debt the person is carrying. Identifying trends on a credit report helps you get a better picture of the applicant’s financial stability.
For example, renters who may have a small credit history but have always paid their bills on time may have similar scores as renters with a longer credit history who have recently fallen behind on payments. Length of credit history is a big factor in determining a credit score, but it may not be the most important factor for determining whether an applicant is at risk of falling behind on rent payments. In the example above, the applicant with a longer credit history may be going through a financial rough patch, which could affect their ability to pay rent, whereas the other applicant is doing a great job at building credit and will likely have a great credit score in time.
Also, even if renters have a good credit score, they may have a large amount of debt, which means they will need to make high monthly payments on that debt, leaving less disposable income to pay for rent and other expenses. Contrary to popular belief, an applicant’s income, checking, and savings account balance is not on their credit report. While some marketplaces like Kopa ask renters for that information, you can always double-check it with the American Apartment Owners Association (AAOA).
Once you’ve verified income, you should be able to determine whether the prospective tenant can comfortably pay for rent, their monthly debt, and their daily expenses, without having to worry about using their security deposit to cover any unpaid balances later on.
Analyze criminal records with safety in mind.
Your applicant seems like a good person, so why bother with a criminal report? Here are three reasons why screening prospective tenants using a criminal background check is an important step:
- First impressions can be deceiving. Good criminals are masters at assimilating and being polite to earn trust.
- Finding out whether your applicant is registered in a sex offender database may be your responsibility as a rental property owner if your property is near a school or daycare.
- Showing that you consistently screen for criminal records will allow you to reduce your liability should your tenant engage in some sort of criminal activity on your property. As a landlord it is your responsibility to take appropriate measures to keep all your tenants safe.
By using a screening company like AAOA, you’ll get Fair Credit Reporting Act (FCRA) compliant records, meaning the records shown are guilty verdicts dating back up to 7 years. Although you may be receiving FCRA compliant records, HUD has issued guidelines for how all rental housing providers should be using criminal history when making a decision. For example, you can't immediately deem a criminal history a red flag and automatically deny prospective tenants with criminal records. (Similarly, the Fair Housing Act prevents you from denying potential renters because of their national origin or sexual orientation.) Instead, you must look at each individual on a case-by-case basis. You should always consider how long ago the crime occurred, whether the crime poses a threat to the safety of you and other residents, and what steps the person has taken to rehabilitate since the crime.
Keep in mind, a few cities, such as Oakland, Seattle, and Portland, have recently passed legislation restricting the use of criminal records in your rental decision. Be sure to check your local legislation and consult with legal counsel to make sure you are in compliance.
Use rental history and eviction history to determine risk.
A person who has been evicted in the past may have trouble paying rent moving forward. When picking a tenant screening company to use be sure to look at what address history database they use. An eviction report is only as good as the addresses that the tenant screening company can find. Most eviction records don't include a social security number or a date of birth so the person's name spelling and address history are crucial for identifying a positive match. In addition, the credit bureaus stopped reporting nearly all evictions on credit reports in 2017, so don’t make the mistake of relying on a credit report alone.
AAOA uses its own address history database based on the person's social security number or taxpayer ID number to determine where the applicant has lived and also whether there have been any eviction judgments issued against them at those addresses.
However, finding an eviction may not be a deal-breaker. If you’re still interested in filling your vacancy, talk to their previous landlords, consider asking them for a cosigner, or have them purchase LeaseGuarantee. This service provides landlords with up to $10,000 of protection for damages, lost rent, and legal fees and can be used instead of a cosigner.
Don't forget: Use objective data in your screening process.
Running a credit and background check can bring you peace of mind when you're looking to open up your rental property to someone new. Properly screening a tenant, while following the Federal Fair Housing Laws, not only makes it easier to find great tenants who always pay rent and may also reduce your liability. Rather than going on a gut feeling or taking someone else's word for it, you can use objective data to make intelligent renting decisions no matter how long the person will be staying in your rental.
The American Apartment Owners Association is the largest landlord association in the country with more than 116,000 members nationwide. AAOA provides an online network of resources and benefits for landlords and property managers including tenant screening, landlord forms, legal updates, and education.