Guide to Screening Tenants

Posted in Blog  
  on Sep 03, 2015

Bonus: How to Read a Credit Report

Choosing a new tenant can be overwhelming, especially if you’re a new landlord or have had the same tenant in a property for several consecutive years. It’s always good to remember that while vacant properties cost you money, delinquent tenants can cost you more. While renters are looking for the right property to rent, as a landlord and property manager, you are looking for the right tenant for your property. Not every applicant will be right for your property. That’s okay. Don’t get discouraged. A good game plan will help you streamline the process and take some of the stress of choosing a new tenant from the equation.

Screening a Potential Tenant

Tenant screening is an absolute must when you are looking for a new tenant to fill your property. If you skip this vital step you are opening yourself and your investment up to terrible losses that could severely hurt your income. Knowing who resides in your home begins with an application. You may choose to use a physical version that you can hand to the applicant when you meet with them or, more likely, an online version that allows you to save time and paper.

Gathering application fees to run full tenant screenings on every single person that shows interest in your property can be difficult and time-consuming, so begin with a prescreening. This begins with letting your applicants know what your expectations are.  Your listing should include information such as the rent rate, smoking policies, pet policies, and any credit/income requirements that you may have. Letting your applicant know these things up front shows them that you are going to be honest with them and will allow them to bow out gracefully if they know that they will not be the right fit for your property. You should have all of your policies in writing and they must apply to all residents that apply. Sticking to your policies that you’ve created will help to hedge against appearing as if you are discriminating against an applicant.     

Meeting an applicant face-to-face allows you to handle several items of business. As the second round of prescreening, it allows you a chance to ask questions, give a quick tour of the property, and collect the application fee for the full tenant screening. While this does not always hold true, if an applicant shows up late, does not have the full fee on hand, or is untidy in their appearance, you may think twice about them as a future tenant.  Do keep in mind that just because an applicant appears to be everything you’d ever hoped for, this is no reason to skip the tenant screening. It is your first line of defense.

A full tenant screening should include a credit, criminal, and eviction report. This will give you a fairly well rounded view of the history of person that wishes to rent your property from you.  You’ll want to watch for negative tradelines that indicate late or non-payments, as well as bankruptcies and collections owed on. When you read over a credit history it is always a good practice to look at the details and not focus entirely on the score or recommendation given. Verifying employment and checking with prior landlords are also part of the screening process, though a tenant screening company may not cover these. Even so, if your applicant passes the credit, criminal, and eviction check, you still should not leave these two things to chance. The sad truth is that people do lie about their income and past experiences. An eviction may not be on the records yet if it is in the process of being filed for the property that they are currently in or the landlord may have decided to take another route that might not show on a typical tenant screening.  Reaching out to employers and asking for pay stubs help to give you peace of mind that the applicant is gainfully employed. Checking with prior landlords (usually two or three back) ensures that they are not trying to slip past your safeguards.


 If you’re on the fence between two or three qualified tenants you may have a difficult time choosing between them.  Some landlords are turning to social media for an alternative form of tenant screening, but you should always be careful with this.  While it may give you a great outlet to check on an applicant’s lifestyle – are they partiers? Tidy? Slobs? – and if they have any pets that they may or may not have mentioned to you, a landlord or property manager should tread carefully so that they do not appear choose one applicant above another using something that may be deemed illegal according to the Fair Housing Laws. If you choose to take this route, make sure you are up-to-date with all of the laws associated with it. Social Media is a great tool, but you don’t want to risk landing yourself in trouble.

Follow the Law

There are local and federal laws that dictate the process that you will need to follow to find, screen, and accept a tenant. While the federal laws will cover the country, you’ll also want to check in on your state, county, and even city laws to make sure that you are fully informed. Ignorance is not an excuse that can be used if someone claims that you’ve broken the law as a landlord or property manager, and it can cost you in money, time, and reputation. These laws are meant to help you both, so being fully aware is a must. They are consistently changing and updating to meet the needs of landlords and tenants and better help to regulate that relationship.   


The Fair Housing Act touches on situations from the moment that you start marketing your property and all the way into the actual tenancy and was put into practice in 1968. It has been updated as different situations arise. On whole, it’s meant to keep people from being turned away from housing based on race, color, national origin, religion, sex, familial status, or disability, though some local laws will add to these, so it’s best to make sure that you are well aware of all laws that apply to your property. You will want to be very careful in how you word your advertisements for your properties as well as what questions that you ask those that apply. If you even appear to be leading them in one direction or another – for example, indicating that an apartment close to the playground would be better for the applicants when you find out that they have children and not offering to show other properties as well – that may be seen as discriminatory. Refusing a disabled applicant reasonable accommodations such as a service animal in a property that does not allow pets may also be seen as discrimination.  There are also exemptions to the FHA that might com into play.  

Once you have found an applicant that appears qualified and has passed the pre-screening, you will need to receive permission to run a tenant screening on them. While criminal checks are performed on public criminal records, it is a good practice to be upfront and clear with what kinds of reports that you will be running on your applicant. You will need direct permission to run a credit report. Some tenant screening sites make it easier on you by reaching out to the tenant directly for this permission, but you may consider keeping a signed permission slip on file for your records as well. State-specific documents such as these are easy to purchase and download online.

Finally, once you have chosen the best applicant to become your tenant you will sit down with them to sign the lease. This is a legal document that should always be signed by both parties before the tenant is allowed to move into the property. The lease will dictate what is expected from all parties involved so that if there are any questions at a later date, you may refer back to the document.  This will be one of the most important ways (aside from the screening process itself) that you’ll protect your property and your investment. It legally binds you both to the promises made and will help to simplify your landlord-tenant relationship.

Conclusion

Finding that perfect tenant can be stressful, but you’ll find the policies that work best for you with each time that you go through the process. Speak with other landlords and ask advice. While learning from your own mistakes is a necessary part of growing your business, learning from others so that you can avoid the mistakes that they made is even better. Choosing a great location that will appeal to the types of tenants that you’d like to attract, going through a full and detailed tenant screening process, and abiding by the laws set up to govern the landlord-tenant relationship will help set you and your new tenant on a smoother path and encourage a great working relationship.


Bonus:
How to Read a Credit Report

When you open your rental property up to a person it is safe to say that you’d like to know that you are making the best choice in the tenant that you accept. You have gone through the first steps of the screening process: you have asked the interested individual to fill out an application, have spoken to them briefly about their qualifications, and have collected the screening fee. This process has likely helped to narrow your pool of applicants down to a serious few and now it’s time to look over their credit and criminal repors.

If you are a new landlord or are switching the service that you use to run tenant screenings, you’ll want to make sure that the tenant screening that you order provides, at minimum, a full credit report and a nation-wide criminal check. Some HOAs that your property may be apart of may require a certain level of criminal check to be performed in order to rent to an individual within that community.  Overall, it’s safer to conduct a full, nation-wide criminal search rather than rely on your applicant to provide you with accurate information of the areas that they have lived in.

A credit report may include somewhat varying information, but you should look for one that includes a credit score, tradelines, and public records (which should also include collections). Below we’ll go through what is included in each of these, as well as a few other options you may wish to persue in a credit history. For consistancy’s sake, we will be using LandlordStation’s sample report, though if you pull a report directly from a credit agency it may be formatted differently.

Credit Score

A credit score is provided by the credit bureau that the report is pulled from. For LandlordStation, this is Trans Union. There are three major credit agencies in the United States, and while those scores may differ slightly depending on the information found in the agency’s database, they should be fairly similar.

Credit scores tend to range from around 300 to 850, though 800 is considered near perfect. The tradelines found below the credit score will detail out what information the credit bureau has used to formulate the score itself. Most tradelines will affect the score up to seven (7) years and will affect it less and less with each passing year. In other words, if the year is 2015 a negative tradeline from October of 2014 will weigh heavier against the credit score than a negative tradeline from October of 2010.

Score factors are often detailed out next to the score provided. These are notes that the credit agency will provide that explain what went into their calculations.

There will be times that no score is provided. If a score cannot be calculated, this often means that the individual does not have an extensive or recent credit history. Individuals that pay in cash, do not use credit cards, and do not take out loans will likely have a very bare credit history and a score may not be available for them. This does not necessarily make them a poor canidate, though you may wish to focus more on other forms of screening (such as references and their criminal and rental history). If your applicant claims that they should have a credit history or they find a discrepency in the history that was provided, they should contact the credit bureau immediately.

Credit Summary and Tradelines

A credit summary will be where you will see the summarization of the different items found on the credit report. The tradelines will be the details of that summarization. There are five (5) catagories under the summary on LandlordStation’s credit reports.

1.    Closed with Balance – This will be a summary of any tradeline that was closed with a balance still open. It may have been a loan or a credit card. The reasons that it was closed before it was paid off may vary, and those details will be found in the tradelines.
2.    Revolving – A revolving balance will change. This is not a set amount, such as a loan, but one that is often being paid on and added to such as a credit card. The important thing to note here is the percentage of the debt that is being used at any given time. A person who have been approved for $100,000 of revolving credit and is using $10,000 is in a much better position than one who is approved for $5,000 and is using all $5000 of it.


3.    Installment – Installment balances are lines of credit that will be paid in installments, such as an auto loan or a student loan.
4.    Mortgage – Lines of credit for a mortgage stand apart from other installments.
5.    Open – The open category is simply anything that is still active and has not been shut down either by the creditor or the invididual that the report is being run on.
Under the summary the individual and total amounts will be listed for the balance, high credit, and monthly payments.

Tradelines will provide details on the information under the credit summary. Each tradeline (both open and closed) will provide information on the name of the creditor, the loan type (ie if it is a credit card, auto loan, student loan, etc etc), current rating (meaning if it is currently being paid on, if it is late, etc), the balance, if any money is past due, and what the credit limit is. It will also note the high limit, meaning the most owed on that tradeline. This will include any fees associated with late dues. Dates will be provided for when the tradeline was opened, closed, and also when it was most recently reported to the credit bureau.


Collections

Collections are lines of credit that were shut down by the creditor and the debt was sold to a collection company. The collection company may be awaiting payment, and if so it will be noted in this section of the credit report. The collection section of the credit report will note the name of the original company owed, the balance owed (this should be looked at for the current balance over the ‘past due’ section), the high credit, and the agency that currently holds the debt. The collection will have a date opened section that will show when the tradeline was placed for collection, and if it has been paid and closed it will note that next to the open date. If the collection shows a balance and does not have a paid or closed date, it likely is still an outstanding debt owed. As of 2014 medical collections do not impact a credit score as heavily as other collections might.


Public Records

Public records will include any legal proceedings that affect the applicant’s credity-worthiness. This may be a civil judgement, a tax lien of some kind, or any number of things. These are all considered negative marks against the applicant’s credit history.

 

Other Options

Some credit reports will offer various other options such as previous address history, known aliases, and employment history. This information can be vaulable when fact-checking your potential tenant, as they will often provide this information on the application that they bring to you.

 


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