Rejecting an Applicant
Landlords spend a great deal time and effort to attract and qualify potential tenants. Not all prospects who express some interest in the rental vacancy will complete an application. Not all applicants will qualify to the landlord’s rental criteria. All applicants that do complete the application process will require the landlord to perform tenant screenings in a consistent and non-discriminatory manner. Of those applicants that do qualify, only one will be offered tenancy. The others will be rejected.
The decision to say “No” is a business decision that some landlords find difficult. To aid in the decision making the landlord can provide a copy of his tenant screening criteria and screening process to interested prospects. In some states a landlord may be required to provide such disclosure to prospective tenants. The disclosure may allow prospects to self-qualify themselves to the landlord’s rental criteria before making a rental application.
Rejecting an applicant is part of business management – an assessment of the potential risk that the business may have to absorb if the tenant is installed. It is important to develop rental policies that protect the business and the tenants already in residence.
By setting rental standards to support his business and keep compliant with applicable laws on all governing levels, the landlord sets the level of risk he believes his business can afford. The selection of a new tenant is considered the most important business decision a landlord can make for his property management. The amount of due diligence a landlord gives to this critical task of tenant screening can directly impact his business operations.
Some applicants may be rejected immediately for obvious business reasons. Other applicants may qualify but may be in competition with other qualified applicants for the vacancy. Decisioning is the landlord’s choice provided legal compliance and legitimate business purpose underlies his decision.
What is important is how the rejection of an applicant is handled with proper notification in a timely manner. Documentation of the facts will help to defend against an applicant’s claim of discrimination or other cause for action.
There are many legitimate business reasons to reject an applicant.
Lease Terms and Conditions
An applicant’s failure to qualify under the landlord’s lease terms and conditions is a common reason to reject an applicant. As examples, a landlord sets his requirements for:
- Length of lease term (fixed term or month-to-month)
- Security deposits and fees
- Occupancy limits
- Property specific policies
- Property/Unit availability date
- Signed, fully completed application
If the applicant will not or refuses to agree to stated lease terms and conditions, a landlord should reject the applicant. If a landlord determines that an applicant has falsified information or provided misleading information, the landlord should reject the applicant.
Tenant Screenings
The results of tenant screenings and verifications can disqualify an applicant from consideration for tenancy. An applicant can fail to qualify because of:
Credit Report/Credit Score
Every landlord sets his own business criteria for an acceptable credit report/score. A review of the applicant’s credit history may show items that the landlord considers a risk to the business, such as a history of slow pay or missed payments, or substantial debt obligations.
A low credit score may or may not cause an applicant to be rejected. There is no hard line on what credit score should automatically disqualify an applicant. Many landlords use the credit score and the analysis of the full credit report into consideration within the context of the landlord’s business. It is the landlord’s decision to determine if the risk is too high for his business.
Income Standard
The industry standard for gross income to rent is a ratio of 3:1. If the applicant cannot provide verifiable proof of income to meet the income standard, a landlord should reject the applicant. If the gross income to contracted debt ratio is insufficient to support general living expenses including the expected rent amount, a landlord should reject the applicant. A general rule of thumb is that contracted debt payments including the rent cannot exceed 50 per cent of the applicant’s gross income.
Bankruptcies and Judgments
A tenant bankruptcy will impact a tenant’s credit score. Some landlords may take into consideration a tenant’s satisfactory payment history since a bankruptcy discharge, or consider if the bankruptcy filing was for a debt obligation that was outside the applicant’s control. It will be the landlord’s decision regarding the tenant’s potential risk to the business.
While a discharged bankruptcy and the length of time that has passed since the filing may be taken into consideration by a landlord, a judgment filed against an applicant for money damages for unpaid rent or property damage is a legitimate business reason to reject an applicant.
Background Checks
Landlords must comply with federal, state and local laws that regulate or prohibit the use of criminal history background for tenant screenings. A landlord’s blanket policy that excludes any person who has been convicted of any offense is discriminatory and violates provisions of the Fair Housing Act. Arrest records cannot be used to determine an applicant’s qualifications and are not a valid reason to deny housing to an applicant. A landlord may only use a criminal conviction to deny housing to an applicant if the record clearly shows a criminal conviction that would endanger the safety of other tenants, or put the property or neighborhood at risk.
There have recent changes in state laws and some local ordinances that may restrict or disallow a landlord’s use of criminal background checks for tenant screening. A landlord should conduct due diligence for the current applicable state and local laws or consult with experienced landlord-tenant law attorney to determine compliance requirements.
Verifications
The results of verifications can disqualify an applicant from consideration for tenancy. An applicant can fail to qualify because of:
Employment
A landlord should verify an applicant’s employment directly with the employing organization. If the landlord is unable to verify employment, or the applicant has been terminated from his employment a landlord should reject the applicant.
A landlord may consider that an applicant who is only recently employed or have had frequent job changes in a short period of time may be a risk to the landlord’s business. If there is a valid business reason to do so, a landlord may choose to reject the applicant.
Eviction Record
An eviction search should always be conducted to determine if the applicant has a history of eviction. An eviction is a red flag to most landlords to reject the applicant. With recent changes in public records reporting on consumer credit reports, a landlord cannot be certain that an absence of eviction/money judgment on the credit report is an indication that the applicant does not have an eviction history. Contacting previous landlords to gain direct knowledge of rental history behaviors may be useful in determining eviction history or issuances of eviction notices.
Landlord References
If there are unsatisfactory references from previous landlords and those landlords would not rent to this applicant again, a landlord should consider these reports to be an indication of business risk and reject the applicant. If there was unpaid rent, property damage, nuisance complaints, violence, criminal activity, or lease violations of any type at the applicant’s previous housing address, there is a good probability that similar problems could occur in the future. Such actions may indicate the landlord should reject the applicant.
Notifications
When an applicant does not qualify under the landlord’s rental criteria, a landlord should move quickly to notify the applicant that he (the applicant) has not been selected for tenancy in accordance with the law. Providing timely notification allows the applicant to move forward and continue his search for rental housing with other landlords and properties.
Adverse Action Notice
An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes a landlord’s denial of a rental application as well as an action by the landlord that imposes a burden on the applicant that is not required of all tenants, such as requiring a co-signer or a larger security deposit.
When a landlord takes an adverse action that is based solely or in part on information contained in a consumer report or tenant screening report, the Fair Credit Reporting Act requires the landlord to provide the applicant with notice of the adverse action. The adverse action notice is required even if the information in the consumer report/screening report was not the primary reason for the adverse action.
The notice must contain certain information:
- the name, address, and phone number of the credit reporting agency (CRA) [including a toll-free number for the nationwide CRA(s) that supplied the report,
- a statement that the CRA didn’t make the adverse decision and can’t explain why the decision was made,
- notice of the consumer’s right to a free copy of their report from the CRA if the consumer asks for it within 60 days,
- notice of the consumer’s right to dispute the accuracy or completeness of any information provided by the CRA, and
- the consumer’s credit score, if a score was used.
Federal law does not require a landlord to provide an adverse action notice if the decision to reject the applicant is based on information that the applicant furnished or the landlord or his employees verified on their own. Landlords should conduct due diligence for state statutes and local ordinances to determine if there are adverse action requirements at those levels.
Documentation
A landlord will need to keep written documentation of the reason why the applicant was rejected along with supporting documentation such as screening reports or reference interviews. A good paper trail will help to defend against a claim of fair housing discrimination. All applicant documentation including the completed application, tenant screenings, verifications, interviews, copy of the adverse action notice, notation of date and manner in which the applicant was notified of the denial, and other miscellaneous paperwork should be organized in the applicant’s file and retained according to the statute of limitations for fair housing claims or per state statute.