Why is Credit Check Important for Property Owners?
Credit checks are an essential part of the tenant screening process. They provide an overview of an individual’s financial situation, including the amount of debt they carry and their bill payment history. The credit report is based on the assumption that individuals who have met their financial obligations in the past will do so in the future.
What Do Property Owners Need from Tenants?
You can simplify the credit check process by collecting all the information you need from potential tenants when they apply for the rental.
The rental application is the primary tool for gathering information about prospective tenants. A good rental application will help you filter out unqualified applicants so you can focus on the best candidates. It will also include all the data you need to conduct a credit check. Below is a partial list of information that should be included in the rental application:
- Personal information, including full name, current address, social security number, date of birth, and driver’s license number
- Employment and income information
- Names of cohabitants (such as family members or roommates)
- History of previous residencies, including any past evictions
- Relevant criminal convictions
- Pets, vehicles, and smoking status
Tenant Consent
The Fair Credit Reporting Act allows property owners to obtain consumer reports such as credit reports and background checks, as long as they have a legal purpose. The law does not require property owners to obtain tenant consent before requesting reports. However, property owners can demonstrate that they have a legal purpose by requesting a disclosure in the rental application. When requesting reports, property owners must disclose to the report provider that they will use the report for housing purposes only.
Note: There may be laws in some states regarding the use of consumer reports that are stricter than federal laws. Property owners should understand how the laws apply in their state.
How Much Does a Credit Check Cost?
The cost of a credit check varies depending on the provider and the scope of the report. For example, Experian offers a basic credit check and credit score for $14.95. Transunion charges $25 for SmartCheck Basic, which includes a criminal background check and a tenant-specific credit score (the score owned by Transunion). RentPrep offers a full credit report, background check, and company-owned credit score for $38.
Property owners can charge applicants for the cost of credit checks and other screening reports, but the amount may be limited by state law. For example, California law in 2021 prohibits charging screening fees exceeding $53.33.
Credit Check Services
Many property owners purchase credit checks as part of a tenant screening service. Screening services are available from companies like CoreLogic, RentSpree, and RentPrep, as well as the three major credit bureaus: Experian, Transunion, and Equifax.
Screening services are typically sold as packages that include credit reports, credit scores, and other reports such as background checks and eviction history. These services can be cost-effective if you want to obtain multiple types of reports for each applicant. Before signing up for a screening service, make sure you understand what you will receive. For example, if you want to obtain full credit reports, ensure that it is included in the price.
What to Look for in a Credit Report
Here are some key things to look for when evaluating a credit report:
- Credit Score: FICO and Vantage scores range from 300 to 850. The credit score is an indicator of the applicant’s financial health, but it is not the whole story. If the credit score is low, you will need to read the entire report to understand the reasons behind it.
- Load
Debt: A tenant with significant debt may not be able to keep up with rent payments. Look at the rent-to-income ratio (RTI) of the applicant, which is calculated by dividing the monthly rent by the monthly gross income. Many landlords follow the 30% rule, where a tenant’s rent should not exceed 30% of their gross income. For example, if the tenant’s gross monthly income is $6000, they should not be able to afford more than $1800 per month for rent. - Late Payments: If the tenant has not paid their credit card bills and other bills on time, there is a good chance they will not pay their rent on time as well.
- Credit Inquiries: The credit report lists “hard” inquiries by lenders, which indicates that the tenant has applied for a loan or credit card. New accounts can increase the debt load.
- Late Rent Payments: An applicant is less likely to pay their rent on time if they failed to pay the rent they owed to previous landlords on time.
- Negative Information: Evidence of past bankruptcies, foreclosures, wage garnishments, repossessions, accounts in collections, and similar issues are red flags indicating financial problems for the applicant.
What to Do If the Applicant Has Bad Credit History?
If you review the applicant’s credit report and decide to reject them, you are required by federal law to inform them of the reason for the rejection.
Note: If the applicant has a poor credit score, you should not reject them without consideration. Instead, look for reasons for the low score, such as a large medical bill or expenses resulting from an accident. A positive rental history and steady income may outweigh a poor credit score.
You must provide applicants with the contact information of the reporting agency you used and inform them that they have the right to dispute the information in the report. You should also tell the applicant that you (not the reporting agency) made the decision to reject them.
Frequently Asked Questions (FAQs)
How long does it take to run a tenant credit check?
Results may be available within minutes or several days, depending on the type of report requested.
How do you reject a tenant with bad credit?
Explain the reasons that led to the rejection. Ensure that your explanation complies with the Fair Credit Reporting Act.
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