How to Read a Credit Report and Properly Screen a Tenant
A regularly paying tenant is the joy of every landlord. Therefore, choosing the right tenant is the most important thing. When you have a tenant that defaults on their rent payment, you probably didn’t screen them before committing to a lease.
This article is a quick guide to landlords on tenant screening credit.
How to obtain relevant information to screen tenant
There two important documents for tenant screening credit an owner needs to get for screening a tenant, they include Credit Report and FICO Score. The first thing is for the applicant to complete an application form where you obtain necessary information including:
• Tenant’s full name
• Last two years addresses
• Social security number
• Birth date
• Current employer
• Current landlord
Once done, the law of Fair Credit Reporting Act requires that you get written permission from the tenant to be before conducting a credit search on them. Make sure the written consent is signed and dated. One way of obtaining consent is to include the clause at the bottom of the application form to be signed and dated. Contacting your attorney for proper wording of the clause is important. Note that the credit company will need to confirm you are the landlord and present necessary information requested by the credit company.
Where to obtain tenant screening credit report
Landlords can get tenant credit report from private credit reporting agencies who collect and sell credit files and relevant information about consumers and get the tenant’s FICO score. A credit report contains important financial information about a consumer and it is an important document for landlords who desire to screen incoming tenant for financial credibility.
The areas of interest in the tenant screening credit report include:
• If the applicant has ever filed bankruptcy
• If he/she has history of delinquent paying their bills
• If the applicant has been convicted of a crime or arrested
• If the applicant has been through eviction
• If the applicant has been involved in personal injury cases
• If the applicant is active, financially
The relevant information you get will depend largely on the type of agency you obtained the report from or the type of report you ordered.
Personal steps to take before running a tenant screening credit check
• If the tenant is employed, ask for proof of payment like last pay stubs, recent bank statement
• Ask to see tenant Identity Card and get a copy of it
• Call the current employer to confirm he/she employment status
• Check that the tenant lives at the current address provided and confirm their type of tenancy
Obtaining this information before running credit report will save you time and money should you discovered the tenant lied to you as there will be no need to run the report. However, if you need to proceed with running the report, you can make a choice among available organizations. To locate credit report agencies, search Google for those based in New York for instance. ProRealtyManager.com is verified to screen tenants and do so for landlords and HOA communities as full service property managers.
If the tenant screening credit report is positive and shows Good Credit, you can proceed with processes of accepting the tenant. However, you need to note that credit report is not a full-proof guarantee the report is genuine, some professional tenants know how to influence it. Therefore, your next protection is to make sure you demand security deposit before the tenant moves in.
In case the tenant screening credit report is negative showing bad credit, there are procedures to follow to reject such tenant. Send them an Adverse Action letter to inform them you decline their application and give reasons for your rejection. Also, let them know the agency you used where they can obtain a free copy of their report within 60 days.
Add the balances of the monthly payments and determine the current debt load vs. monthly income of the tenant. In NYC, most landlords would like to see the tenant earning at least 40 x’s the monthly rent. This would enable a tenant to pay off their rent with 1 weeks worth of salary.
FICO scores are between 300 and 850. A score below 600 usually sets off the alarm bells. Sometimes there is a good reason such as a medical bill which was never removed, identity theft, etc. If there is a good explanation the tenant may still be OK, but there may be an additional month security asked by the Landlord. Some Landlords may ask for a Guarantor to sign the lease with an income of 80x’s the monthly rent and living in State if the credit score and income are below 40x’s the rent.
ProRealtyManager.com offers tenant screening including background check, rental history checks, employment verification, and lease signing for HOA condo communities and investors. David Berk is an eMBA and Certified Property Manager based in Brooklyn, NY.