Learn what is included in a tenant credit report, as well as tips for analyzing the report to choose financially secure tenants for your rental property.
Today’s rental market is more competitive than ever. It requires landlords to be diligent, attentive, and savvy — especially during the tenant screening process. After all, no landlord wants to engage in quarrels about unpaid rent or costly processes like serving eviction notices. Evaluating tenant credit reports is an important part of the tenant screening process. Good credit scores and credit history provide landlords with the assurance that the tenant has the capacity to pay their rent on time each month.
Tenant credit reports provide valuable insights, but even the most seasoned landlords may overlook crucial details. Wondering how to navigate a credit report? Here are key factors that landlords should look for when evaluating applicants for a rental property.
Landlords must carefully evaluate tenant credit to pinpoint any red flags. To make renting to potential tenants less risky, familiarize yourself with the different components of a credit report so you’re well prepared to choose financially secure renters every time.
This includes personally identifiable information such as name, date of birth, social security number, current and past address, and current and past employers.
Credit reports offer details on credit and loan accounts that have been opened by the prospective tenant — otherwise referred to as “trade lines.” It typically includes all information surrounding the account such as the type of loan, when it was opened, the credit limit, monthly balance, current status, and payment history.
Whenever an account is pulled, a credit inquiry is recorded. When someone authorizes a lender, company, or landlord to review their credit report upon processing a loan request, it’s referred to as a “hard inquiry,” and can negatively impact a credit score. In contrast, when a consumer checks their own report, it is known as a “soft inquiry” and does not affect a credit score.
There are two types of inquiries — “hard” and “soft.” Hard inquiries occur when a company or lender pulls a consumer’s credit report after they’ve submitted an application for new credit. Hard inquiries have a slight negative impact on a person’s credit score. On the other hand, soft inquiries occur when someone (e.g., a landlord, or the consumers themselves) pulls a credit report but without applying for new credit. Soft inquiries do not impact credit scores.
Public records such as bankruptcies, civil judgements, and tax liens may be included on a tenant credit report. Additionally, any past-due accounts from medical, retail, or credit card bills that have been turned over to collections will appear in the report.
Under federal law, credit bureaus don’t have to provide proprietary information with free credit reports. However, credit reports for sale do include credit scores calculated by the credit bureaus.
Credit scores are a valuable financial metric that help you evaluate a potential tenant's creditworthiness. A score of 580 or less is considered poor, a score of 670–739 is good, and over 800 is excellent. If an applicant has a high credit score, that means they’ve made timely payments in the past. On the other hand, a low credit score shows that a tenant may have a history of defaulting on payment obligations.
That said, some tenants may not have good credit because they don’t take on debt or use credit cards, but they could still have reliable income and fiscally responsible behaviors. A credit score is a good indicator of financial security, but it doesn’t paint a complete picture and shouldn’t be the only factor that landlords review.
A large debt load can be a red flag — but not all debt is equal. Pay close attention to the type of debt an applicant carries. For example, high-interest debt is problematic because the renter can easily become overwhelmed with interest charges. Also, a tendency to rely on credit cards or store financing could indicate bad judgment or poor financial decision-making skills that may impact their ability to pay their rent.
In contrast, student loan debt with a history of on-time payments shouldn’t be a red flag. Additionally, low-interest debt, such as a car payment, is less risky since fewer interest charges accrue and debt payments are more manageable. With low-interest debt, there is also an extra layer of security if a tenant defaults because an asset typically secures these loans.
Examining a tenant’s income allows you to gauge whether an applicant would be able to afford your rental property. To calculate the rent-to-income ratio, simply divide your rent price by the applicant’s monthly salary.
A good rule of thumb is to rent to tenants who have a gross income equal to or greater than three times the rent — roughly a 30% rent-to-income ratio. This helps ensure they’ll have enough left over to cover their other expenses. Landlords may need to adjust their desired rent-to-income ratios depending on the cost of living in their rental property’s market. For example, tenants living in expensive areas like New York City will likely have a higher rent-to-income ratio.
Some renters, like college students, don’t have a good credit score because they’re just starting their financial journey. If you come across an applicant who seems great on paper but they don’t quite meet credit or income requirements, letting them use a cosigner on the lease can help seal the deal. This will give you peace of mind and ensure that if a renter can’t fulfill their financial obligation, they have someone else who can make a payment in full instead.
A tenant’s pay stubs, bank statements, or previous rent receipts will tell you more about their financial situation. Alternatively, you can request a reference letter from their previous landlord or current employer. This will give you a better idea of their financial stability and their rental history so you can judge the risk level of a prospective tenant.
To ensure your prospective new tenant is a good fit, verify that they don’t have any derogatory marks on record in their credit report. Derogatory marks can include past due or collections accounts, bankruptcies, foreclosures, car repossessions, and charge-offs (when an account is closed after being 180 days past due).
Landlords must be sure to maintain compliance when reviewing tenant credit reports. The Fair Credit Reporting Act was created to protect the information that credit reporting agencies collect and ensure that consumer reports are fair, accurate, and transparent. By law, credit report information can’t be shared with anyone whose purpose isn’t specified in the Act.
Some of the conditions of this law include: If you choose to reject a tenant because of negative information revealed by a credit report, you are obligated to give the prospective tenant the agency name and address that reported the information. Additionally, you must inform the tenant that they have the right to request a copy of the file within 60 days.
Performing thorough tenant screening will drastically decrease the risk of having renters default on payments and causing added stress and expense for landlords. With the right tenants, you’ll be able to collect rent on time, every time.
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