As a landlord, it pays to have responsible tenants. Once they fill out a free rental application, it’s up to you to vet them for financial responsibility and a clean record. As part of this evaluation, almost one half of landlords check a potential tenant’s credit report.
What do these landlords look for? Whether you are new to renting property or simply want to adjust how you look through rental applications, this guide will break down the importance of tenant scores and how they factor in to your decisions.
Why does credit score matter?
Renting your property is essentially a business, and you want to ensure a steady income from your business. By checking a potential tenant’s credit score, you get a snapshot of their financial responsibility and security. If a tenant has an impressive credit report, they may be more likely to pay their rent on time and have their security deposit ready.
However, remember that a lower credit score should not immediately disqualify a tenant. There are other factors to consider like past bankruptcies, significant debt, and repossessions. These might be more of a red flag when vetting an individual.
How do I check a potential tenant’s credit score?
Most landlords work with a credit reporting agency to learn about their applicants’ credit reports. You need to collect personal information from the applicant, so be sure to update your rental application form. Ask for their full name, Social Security number or Individual Taxpayer Identification Number, and current address.
Landlords in most states can collect credit report fees from prospective tenants to cover the associated charges. Federal law covers your right to collect this information and use it to vet tenants. However, you need to ensure that you are not discriminating, and that you are holding all tenants to the same standards. Federal law also requires landlords to discard the credit information they are not using, and give a rejected tenant the name and address of the credit reporting agency.
What should I look for in a credit report?
Once you obtain a potential tenant’s credit report, check for the following:
- Credit score
- Credit inquiries
- Lines of credit
All of these factors can teach you more about a prospective tenant’s financial situation. However, you may weigh certain factors more than others. Some landlords will use this information to calculate a debt-to-income (DTI) ratio. Any tenant who has a DTI ratio of over 40 percent may not fit your standards. To double check on all of this information, you can call their former landlord and inquire about their rent payments and security deposit.
As far as their credit score goes, any number under 649 and below is considered “bad” credit. You might choose to set a cutoff point, and reject tenants with a lower score than your standard. If an applicant is hovering around your cutoff, you can ask for pay stubs and past rent receipts. You may also decide to charge a higher security deposit or require them to find a co-signer.
Whether your tenant is working with a credit union in Thibodaux, LA or a small bank in Portland, ME, it pays to have access to their financial past. By carefully vetting your applicants, you can ensure that your tenants reliably pay rent and provide the security you require as a landlord.
As you gain more experience as a landlord, you will learn which application standards are most effective. In the meantime, be sure to research tenant law and talk to seasoned landlords. This will help you rent your property as effectively and responsibly as possible.