How to Evaluate a Tenant’s Credit

by Chris on February 4, 2013

No matter how honest a new rental applicant may appear, a landlord must maintain a standard practice of running a credit report.

That credit information provides the baseline that governs the terms of the tenancy. Without it, a landlord cannot avoid habitually bad tenants and the resulting income loss.

When evaluating rental applicants, many landlords and property managers focus on the credit score. They will consider applicants who are within the acceptable range, and reject all others.

A credit score is an important indicator of a person’s level of financial responsibility.  The scores are created using a number of different criteria that represent the person’s level of financial responsibility.  By focusing on the score, a landlord can save themselves the time it takes to pour over pages of a credit report or avoid the risk of missing something significant.

However, it can be difficult to apply a one-size-fits-all approach to tenant screening. A landlord must decide ahead of time where to draw the line. If that line is too high, the landlord may be discounting otherwise good renters who now have steady employment. Also, when focusing solely on the credit score, it’s easy to become complacent and not complete the full tenant screening process by checking for evictions, criminal history, bad rental history or fraud. See our post Where Do You Draw the Line With Tenant Credit? for advice from professional property managers.

Another approach landlords can take is to focus more specifically on the person’s current ability to pay rent — stable employment and rental history, for instance. If the applicant seems like a good bet, then, the landlord will run the credit report to verify that the applicant has told the truth about their history, and that there are no deal-breakers — like unpaid rent — in their past. This approach requires more nuance than the first and a higher level of due diligence.

Sometimes an applicant with mediocre credit has other qualities of a good tenant — honest, good work history, and a good rental history — and a landlord may want to give that individual a chance. The key in this situation is for the landlord to know what they are dealing with by running the credit report. Landlords working with such an applicant can consider some work-arounds that may limit their risk, like asking for a co-signor, increasing the security deposit (be careful, though, not to charge more than the legal limit), or offering a shorter-term lease that can be renewed after further review.

The approach a landlord takes will depend largely on the pool of available applicants and in some measure on the appeal of the specific rental property.

With either approach, it is crucial to routinely run eviction and criminal background checks. These additional reports ferret out fraudsters, reduce liability by protecting other tenants and neighbors, and help protect the property.

Regardless of which credit evaluation policy a landlord adopts, it is very important to stick to the same policy with each applicant. For instance, if it is the policy to reject anyone with a credit score below 600, and the landlord makes a one-time exception, that could later be viewed as discriminatory. The same may be true if a landlord allows one tenant to rent with a co-signor, but rejects another applicant who would otherwise qualify with a co-signor.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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