Like most landlords, you probably obtain a credit and background check on every tenant. But no matter how much data you have at your disposal, if you don’t know what to look for, you may still be making risky tenant choices without knowing it. Are you spotting these red flags?
1. Eviction Records
One or more evictions in the last seven years is clearly a red flag, but did you know if you’re ordering a credit report alone, you aren’t accessing a full eviction history? In 2017, Equifax, Experian, and TransUnion removed 96%of all civil judgments, including evictions, from credit reports. That’s why it’s crucial to work with a screening vendor that can access a robust database for eviction records.
2. Criminal Records
Not all criminal records should be treated equally. HUD’s guidelines prompt landlords to consider the nature and severity of the crime and whether a conviction is considered directly related to the safety of your residents and your property. In addition, consider the amount of time that has passed and efforts to rehabilitate since the conviction.
3. Public Records
Public records include bankruptcies, tax liens, and civil lawsuits. Tax liens and lawsuits against your applicant increase their liabilities, potentially making it a challenge for them to pay rent in the future. Keep in mind that as of 2017 all three bureaus removed 96 percent of civil judgments and in 2018 they removed 100 percent of tax liens, so a credit report alone will only reveal bankruptcy public records. Talk to your screening vendor and ask them if they have a separate database for public records they can search for you.
4. Negative Credit History Trends
A credit score is not enough to determine if you have a low-risk applicant. Instead, look at credit history trends. For instance, applicants who habitually make late payments may be more likely to pay rent late as well. Secondly, an applicant who has missed multiple payments recently (within the last six months) is trending negatively. If their bills are stacking up, rent could be next to go. Lastly, watch out for applicants that are severely delinquent. For instance, if they have been late 120 days or more, if the account was charged off, or if the account was sent to a collection agency.
The type of account matters. Late medical and student loan payments are typically considered less severe by landlords, whereas utility bills, auto loans, unpaid rent, and pay day loans sent to collections indicate a deeper financial issue.
5. High Debt to Income Ratio
Just because someone has a decent credit score does not mean they can afford to pay rent. Remember, a credit report does not verify income, but it does tell you your applicant’s total debt. After you’ve asked for proof of income, look at the total monthly debt payments the applicant must make to stay current on their accounts. Is their income high enough to pay rent, all of their bills, and living expenses comfortably?
If the applicant has a deferred student loan, the loan has been put on pause, potentially because of income issues or due to re-enrollment in school. Ask the applicant about their repayment terms, because student loans are only temporarily deferred and can become due in the near future.
6. Identity Verification Issues
Having the right name, date of birth, and Social Security Number (SSN) is crucial for an accurate background check. Look for alias names, alternate SSNs, multiple dates of birth, or other warnings on the credit report to verify the information you entered is valid. Cross reference the rental application and a government issued ID. Review their previous address history and make sure it matches what they provided you. Picking up on minor discrepancies, whether intentional or not, could make a big difference.
The first step to intelligent decision making is accessing the right information and the second step is interpreting it correctly. Verify you are getting all the data you need from your screening company and do your homework to spot red flags.