Signing a lease with a new tenant is a step you take with caution. What if this person is negligent and does damage to your rental property? What if they terrorize their neighbors? Worst of all, what if they don’t pay their rent?
You cannot count on your intuition to choose a new tenant.
You did your due diligence when you purchased your income property. You wanted to ensure that you would get a good return on your investment. It is even more important that you conduct due diligence when it is time to rent out those units. An immediate, comprehensive landlord credit check will help shield your real estate assets against deadbeat tenants, expensive eviction costs and loss of your rental income in addition to avoiding a great deal of aggravation. Most importantly, you are avoiding the financial pain of a vacant rental unit.
The difference between finding a great tenant and one who turns out to be a freeloader may be revealed in the information you discover when running a credit check on a potential tenant. Generally, an up-to-date credit report covers the past seven to ten years. It will help you figure out if the applicant can pay rent on time without getting into financial difficulties.
Arming yourself with the personal and financial history and fiscal habits of a possible renter will shield you from an expensive eviction and costly lawsuits in the future. Before you hand over the keys, you can achieve peace of mind while protecting your rental investment with a simple, instant rental credit check on your prospective tenants. As an AAOA member, it takes just a few minutes to see if they are likely to respect your unit or pay their rent on time.
Following are the five areas of information that a tenant background check will reveal about your applicant. They can protect you from renting to a deadbeat tenant.
What does a tenant credit check reveal?
- Personal Information
This section of the tenant background check includes the applicant’s current and former names, aliases, their social security number and date of birth. Their present and past addresses and employment history are also included.
- Credit Rating (FICO Score)
The FICO score provided is based on reported credit information. No additional information is considered for the score. As a responsible landlord, you should be evaluating not only the FICO score but their eviction records, criminal history and other information available, such as TeleCheck and sex offender searches.
- Negative or Potentially Negative Items
Information about negative or potentially negative items is typically on the first page of the credit report. It can include mortgage information, credit cards and revolving accounts. Does your tenant have a history of paying bills by the due date? You can find any accounts that are past due, discharged or in collection. You’ll find the name of the collection agency, amount and type of the collection and whether it has been paid. This data can indicate whether they are likely to pay their rent on time.
Psychologists agree that past behavior is a useful marker for future behavior. If prospective tenants have a history of not paying their bills or habitually paying their bills late, it is likely that this behavior will continue in the future – meaning that rent payments will be late or missed.
On the other hand, people do change. If the late payments or non-payments are old and the tenant has been paying bills on time since the negative items occurred, it may be possible that it was a one-time mistake and they are attempting to correct their past irresponsible behavior.
- Bankruptcy, Eviction or Foreclosure on a Home
A prior bankruptcy, eviction, monetary judgment, liens or foreclosure on a home are obviously a bright red flag that need further investigation and perhaps a conversation with the applicant regarding the circumstances of a negative item. It may be that the applicant had a lengthy period of unemployment due to health problems. Or they may have lost their income due to outside conditions, such as a recession. Hear what they say before making your final decision.
- Individual Credit Accounts and Loans
The tenant credit report will list the applicant’s debt, monthly obligations and payment history. It will show open accounts, credit limits, closed accounts and total account balance. Review each account for late payments and note how past due those payments were, such as 30 days, 60 days or 90 days delinquent. This information is a good indicator as to whether you can expect to receive your rent by the agreed upon date.
How much will a Tenant Screening cost me and what does it include?
While eviction proceedings will cost you thousands of dollars, a free membership in AAOA can provide you with a tenant screening report for as low as $19.95. Completely automated, you can process a tenant credit check for a rental applicant at any time, day or night, with instant results posted securely online for your review. There are also plans that include the option to have the prospective tenant pay for the credit check.
Your membership in AAOA also includes access to more thorough tenant background checks. These enhanced plans not only furnish the landlord with a rental credit check and credit score, they provide the following information depending upon which package is chosen.
AAOA Tenant Verification Services
- Credit Report
- Previous Address Tenant History
- Eviction Nationwide
- Sex Offender Registration
- Federal Search
- Credit Score
- TeleCheck Verification
- Criminal Nationwide
- LeaseGuarantee Analyzer
- Social Security Number Fraud
How do I begin the process of procuring a rental background check?
Obtaining an official AAOA tenant screening report is fast and easy.
- Select and order a tenant screening. You’ll be provided instant access to all reports except the credit report and score.
- AAOA will email your tenant a unique link where they will log in to confirm their identity and agree to release their credit details to you.
- AAOA will immediately notify you by email when the credit report and score are ready to be viewed.
Can I get a credit report without waiting for the tenant’s permission?
If you do not want to wait for the tenant’s permission, we can underwrite you. Becoming underwritten is optional and allows you to gain immediate access to credit reports for the permissible purpose of tenant screening. Once approved, you will receive instant credit reports at checkout. The tenant’s email address will no longer be required. Underwriting is especially recommended for owners of 10+ units.
The underwriting process entails some documentation on your business. Documentation varies but generally requires a copy of your driver’s license, completed rental applications or leases for existing tenants and a voided bank check. An inspector will visit your office to verify your business and office security. It can take 3‐5 business days to set up this appointment. The onsite inspector will be looking for a locked filing cabinet and a paper shredder.
The fee for underwriting varies from $0 to $79 depending on the level of your AAOA membership. This is a one-time fee if you manage your rentals from a commercial location and a yearly fee if managed from a residential location. It is best if you set up your underwriting before you have a vacancy. Once you are approved, you will then be able to view credit reports instantly.
To start the underwriting process simply log in to your account. The option for underwriting will then be found under the Tenant Screening menu.
My applicant doesn’t have a credit file
The absence of a credit history should not automatically preclude an applicant from renting a home from you. If you sense that they have the other characteristics that would make them a trustworthy tenant, get creative and find other methods of verifying their identity, income, employment and rental history. For instance, if they normally pay their monthly bills in cash, ask to see receipts. Even an on-time monthly payment to Netflix or a utility company can demonstrate responsibility.
A letter from the applicant’s employer and pay stubs will verify their employment and indicate whether they can afford to pay you rent. Did they file an income tax return with the IRS for last year? Ask to see it. Have they previously rented? Contact those landlords to see if they paid on time.
It is also recommended that you require a larger security deposit or advance payment of rent and include it in the rental lease agreement. You might also suggest a co-signer to the lease. Such a person will have to meet your credit requirements and be responsible for monthly payments and rental terms.
How to reject a tenant applicant
Choosing a new tenant is more than just checking to see if they can and will pay the rent each month. Sometimes there are more intangible reasons for accepting someone’s application over another equally qualified tenant. Perhaps you would prefer a non-smoker or one who does not have a pet. Obviously, you want someone who seems like they will respect your property and treat it well.
But how do you handle rejecting an interested rental applicant? Having a consistent legal and effective approval and denial system for your rental application process is essential. Following are three ways to notify someone that you are rejecting their application.
- Adverse Action Letter
If you reject an applicant because of negative information on their credit report, an Adverse Action Letter is required to comply with FCRA (Fair Credit Reporting Act) regulations. It includes the contact information for the consumer credit reporting agencies that provided data on the applicant. This contact information allows the rejected party to obtain a free copy of their report to assist in learning why there was a negative decision. A declination letter, or adverse action letter, is included free with every tenant screening order.
- Declination or Adverse Action Letter
As long as your reasons for rejecting an application are legitimate, such as not breaking any laws regarding discrimination, etc., you should not feel obligated to accept a tenant you determine is not qualified.
For example, your decision to reject an applicant may be based on factors such as income, credit or stable employment, but it may not be based on a person’s race, sex, religion, etc.
You can protect yourself with a denial letter to inform the applicant that their application was not approved. Below are a few of the reasons that may result in the rejection of the applicant.
- Rental price offer not accepted
- Unable to verify or insufficient employment
- Credit history (Adverse Action Letter to accompany)
- Incomplete application
No applicant wants to be rejected, but a declination letter, when needed, helps you manage your time more efficiently. It may also gives the applicant a courteous, detailed explanation of why they were declined.
- The Non-Rejection Rejection
One of the methods of not accepting a tenant is to make the applicant understand that there are other applicants also being considered and that you will make your decision based on the first qualified application.
Often, it comes down to a decision of accepting the best of two or more rental applicants, all of whom are being considered until the lease is signed. If your first choice does not work out, go to the “second place” for a lease signing and so on. It is less confrontational to let them believe they are still being considered, even if it is not for this particular rental. In fact, if they are qualified, you might contact them at a later date for a future rental opportunity.
Tenant screening via a verification service is easy and affordable, especially when compared to the financial losses a landlord will face if they rent to just one bad tenant. But screening a prospective tenant is not pure science. It is a combination of ordering and understanding the appropriate reports available, verifying the information provided by the applicant and ultimately a judgment call based upon a big picture view of the information provided and the applicant. Do not let a lack of information stand between you and your profits. But remember, when screening credit, criminal, eviction and rental history, take care to stay fair. Treat every applicant equally and fairly to ensure there are no violations of FCRA when evaluating an applicant.
AAOA is an expert in our industry and can answer your questions today regarding any product offered. Since 2004, our resources have centered on landlords and property managers. We are ready to provide you with the 5-Star service our members have relied on for their tenant screening services.