Is screening applicants important for my rental property? Let me answer that question with another question. Would you give somebody you didn’t know the keys to your car without checking them out first? I thought so. The same goes for your property.
Your property is valuable and you want to minimize the risk of having it damaged or have a resident who doesn’t pay you rent for months on end. How does screening do that? First, let me say that this is not 100% guaranteed. What it does is minimize the risk. Just like any type of investment, you are going to do your due diligence to minimize the risk of loss. The same type of due diligence should be done in screening applicants. When screening there are a number of items you want to verify. The items you will want to review is the applicant’s credit history, criminal background, employment and income verification and rental history. I’ll review each of these.
This post we will cover the first on our list and that is the applicant’s credit report; which is the most typical item reviewed. For private landlords this is not easily attained, but they can request it from the applicant or request it from a tenant screening service provider. It is never recommended to request a copy from the applicant, as there is the possibility of receiving a fraudulent copy. With software programs today all sorts of forms are easily recreated to show a more positive history.
Credit reports show you how well a person has payed their bills by outlining their payment history with individual creditors. This gives you an idea of how well they will pay you their monthly rent. Any prospectus you would receive from an investment firm states, “Data quoted represents past performance and does not guarantee future results.” The same holds true for your applicants. You don’t know what may happen to them in the future; they may have an accident, suffer a job-loss, or any number of other income-depleting consequences that could affect their ability to pay their rent on time or at all.
What items should I review on the credit report? If you’ve never looked at one, it could seem like your reading a bunch of gibberish, so take the time to have someone experienced assist you in reviewing it the first time. Credit reports will show you an overall credit score along with the consumer’s payment histories reported by credit card companies, finance companies (auto loans, furniture finance companies, etc), student loans, hospitals, public records from the courthouse (evictions, foreclosures, etc.), etc.
All will show if the applicant has paid on time, 30, 60, or 90 days late. Any times greater than 90 days will usually show in collections or default. Some creditors may choose to report delinquencies as old as 7 years or more. We tend to review items as far back as 3-5 years. Some companies also do not look at or weigh hospital debts when determining their credit worthiness, as they view it as an unforeseen episode in their lives. These setbacks may affect their overall credit history, so you want to view how all debt was handled during those dates of hardship.
How you or your property manager handle the review of credit reports is important when it comes to consistency and storage. You must remain consistent with your criteria with determining what credit scores, delinquencies and other items in the report you’ll accept with all applicants. The other important factor with credit reports is the handling, accessibility and storage of credit reports. The reports contain very personal and sensitive information and must be handled in accordance with the Fair Credit Reporting Act. Failure to do so could cost you thousands in fines and loss of privileges that could affect your business for years to come.
This is a basic foundation of using credit reports to assist you in the screening process. A good screening process can make the difference between a very positive and fruitful outcome for all parties involved versus a costly and painful process for the owner and/or property manager.
In our next part we will cover the criminal background check.
Happy Renting!
Juan Restrepo