Is tenant screening still considered the most important business practice for landlords?
Few landlords would argue against the value of tenant screenings to protect their business. Selecting a tenant may be the most important business decision a landlord makes. Tenant screening is the assessment of the applicant’s potential future risk of financial or material default of lease terms and conditions. A landlord’s number one concern is late rent. A primary screening therefore is evaluating the financial ability of an applicant.
Financial Ability
An applicant’s financial situation can be the critical decision point in making tenant selection. A landlord evaluates financial data such as a credit report, credit score, income, income to rent ratio, debt obligations, public reports for bankruptcy, judgments, liens, and other financial documents as required.
Credit Report
Knowing how to read a credit report and properly analyzing the data is a landlord’s defense against a bad risk. A consumer credit report allows a landlord to review the applicant’s credit history, open and closed accounts, and payment history. If the payment history shows slow pays or missed payments it may be an indication that the applicant could have difficulty in making future rent payments.
The trade lines summary on the credit report can provide details of the applicant’s debt load and payment history. A landlord will want to determine if an applicant has sufficient income to cover that debt plus pay rent and other living expenses.
A credit report provides the details of the applicant’s current financial situation some of which may not be disclosed by an applicant during the application process. As examples, if the applicant has recently applied for new credit which could affect his current ability to pay existing debts, has had a recent charge-off on a credit card, or an account sent to collections, the applicant may not have disclosed this information to the landlord for fear that it would jeopardize the applicant’s chance for tenancy.
Credit Score
There are a number of credit scoring models and each model may use different factors to calculate a credit score. A credit score is a general indicator of financial responsibility. It should not be used as an absolute measurement of credit risk.
Income
The ability to make rent is largely dependent upon an income or other funds sufficient to pay rent and other living expenses. The income-to-rent ratio of 3:1 is generally accepted as an industry standard for qualification.
Bankruptcy and Judgments
An applicant may have filed for bankruptcy due to financial difficulties. If the bankruptcy has been fully discharged, an applicant may now be in a better financial position to manage his credit affairs. A review of the applicant’s credit and payment history since the date of the discharge may provide a basis to determine the amount of future credit risk. However, if the applicant’s previous debts have been eliminated in a recent bankruptcy, the applicant may be a better risk than others who have problems with their debt because another bankruptcy can’t be filed for a number year following the prior finalized one, the number of years depending on Bankruptcy Chapter under which completed.
A judgment filed against an applicant for money damages, such unpaid rent or property damage, can be troublesome. A judgment is awarded to a creditor because of debtor default. The money judgment is a financial obligation that the debtor owes until the debt has been satisfied and released. That obligation may have an effect on the debtor’s financial condition and accordingly an effect on qualification for tenancy.
Background Checks
To protect the rental property and provide duty of care to his tenants a landlord conducts criminal background screening. Landlords must comply with federal, state and local laws that regulate or, in some jurisdictions, prohibit the use of criminal history background for tenant screenings. The Department of Housing and Development (HUD) has issued guidelines regarding the use of criminal background checks to make housing decisions. 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. Consideration must be given to relevant factors such as the type of the crime and the length of the time since conviction.
Eviction History
An eviction search should always be conducted to determine if the applicant has a history of eviction. A landlord should check with previous landlords to determine if notice was served on the applicant for lease default and/or a judgment for possession was awarded by the court.
References
References from past landlords can provide information regarding the former tenant’s rental behaviors and payment history.