Think again if you believe that credit scoring is only important when you’re looking to buy a home. With rents frozen due to the pandemic and loss of income, homeowners are more than ever ready to check the credit history of tenants.
The Rental Landscape Shift Due to the Pandemic
During the early phase of the pandemic, homeowners received mortgage relief in the form of eviction moratoriums or payment deferrals, and tenants in properties receiving funding from government programs also got relief.
Additionally, the Centers for Disease Control and Prevention (CDC) issued an order banning evictions for any tenant unable to pay rent. This order ended on August 26, 2021, and the Eviction Lab, which tracks evictions in six states and 31 cities, found a sharp increase in eviction rates. In September 2021, more than 510,000 households received urgent rental assistance from local and state governments, according to Treasury Department data.
But the pandemic changed the rental landscape in other ways as well. Harvard University’s Joint Center for Housing Studies released a report in August 2021 showing the following points: the percentage of homeowners collecting 90% or more of annual rent declined by 30% from 2019 to 2020. Ten percent of homeowners collected less than half of annual rent in 2020, and smaller homeowners with one to five units were most likely to have significantly overdue tenants. The percentage of homeowners deferring maintenance rose from 5% to 31% from 2019 to 2020, and the percentage of homeowners listing their properties for sale increased from 3% to 13%.
These statistics are likely to affect how homeowners view prospective tenants. Homeowners have been unable to evict people who did not pay rent during the pandemic, and most may never recoup the money they lost. Remember that most homeowners do not own their properties outright; instead, they pay a mortgage, meaning they have been depleting their savings during the pandemic (if they had any savings) or are at the mercy of banks.
The Importance of Credit History for Tenants, Not Just for Potential Buyers
“Credit history is important because it indicates a prospective tenant’s ability to manage their financial affairs successfully,” says Gary Zarimba, a broker/owner at PepZee Realty in Dayton, Ohio, which provides rental spaces and property management, as well as homes for sale. “A good credit score usually means that the person pays their bills on time and doesn’t exceed their financial means – so they’ll be able to pay rent to us without any problems as well.”
He is echoed by Jonas Bordeaux, co-founder and CEO of Dwellsy, a rental listing service. Bordeaux explains: “Homeowners who have been burned by tenants who couldn’t pay rent during the pandemic are likely to look for the most secure tenants in the future.”
Bordeaux acknowledges that there isn’t a perfect way to assess a potential tenant’s ability to pay, but he says credit checks are one of the tools widely used. So why aren’t credit checks the only tool homeowners use?
“Typically, rent and evictions aren’t reported to credit agencies, so they don’t really have much data on the tenant’s likelihood of repayment, which can be quite different from other bills,” says Bordeaux. “Moreover, in most cases, a homeowner can’t see the actual credit report; they only look at a summarized score.”
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Services that tenants can subscribe to (such as RentPlus, Rental Karma, and Rent Reporters), for a monthly fee ranging from $7 to $10, will report rent payments to credit bureaus. Potential tenants with low credit scores may find this additional amount of $84 to $120 annually worth investing to demonstrate a history of expected payments to their new landlord.
Other tools homeowners can use to determine the financial reliability of tenants
In addition to the credit history of the potential tenant, there are other ways homeowners can evaluate. Bordeaux recommends eviction reports.
“There are national databases that track evictions in the courts, and a tenant should try to avoid a formal eviction order from the court if possible”, says Bordeaux. Additionally, he states that homeowners can request a reference from a previous landlord. “This is a great way to reassure the new homeowner, so consider asking for a letter describing your stay from your current landlord before you leave”, advises Bordeaux.
Zarimba agrees that there are other factors homeowners can consider. Given the shift caused by the pandemic, he says homeowners may be more understanding of applicants’ credit histories. “We also look at the potential tenant’s eviction history and conduct a background check”, Zarimba explains, adding that a series of recent evictions will disqualify an applicant regardless of their credit score.
“Employment history is also an important factor in evaluating a tenant’s application, but we are more lenient about that, recognizing that people were laid off during the pandemic”, Zarimba continues.
However, he adds that his company will primarily look at how stable the potential tenant’s financial life is today – compared to the lockdown period in mid-2020. “This is more important than what their life may have looked like years ago”, he concludes.
Source: https://www.realsimple.com/work-life/money/home-finance/renter-credit-score-more-important-than-ever
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