This post will tell you how to use credit checks for screening renters.
Why do we care about Credit Records and Credit Score? A credit is score is an indicator of the probability of a default, nothing more. It will show if the person has been responsible with their finances. If a person is responsible with their finances, odds are, they are also responsible with the rest of their lives. A credit score of 700 or better, indicates a solid person. A credit score below 600, indicates a person with some issues, maybe permanent, maybe temporary.
The credit report will also show payment history, past addresses, recent credit inquires, and judgments.
Previous addresses on Credit Report should match the application. If your applicant has two or more address on the credit report in the past five years, that could indicate a problem. They are constantly being asked to leave, or leases not renewed. They may be a complainer, and nothing satisfies them so they move. They move in with roommates, or roommates move in with them, and they get a new address. Watch for new roommates in your unit. Or there could be a good reason. Find out.
Judgments indicate payout order. If you are not the first judgment, you probably will not get paid in bankruptcy or garnishment. The applicant should have more good accounts than bad accounts, especially recently. Look at the derogatory account names for landlord defaults and apartment names, etc. If the collection companies do not sound familiar, Google the name to see what type of business they are in.
Look at other credit inquiries. An applicant that has been recently rejected by other housing agencies will have those housing inquires listed. If other places are rejecting them, and you are considering them, ask yourself if you are prepared to take on the risk cases other places do not.
Look for small payments defaulting. If they can’t pay Pizza Hut $65, how are they going to pay you rent?
With bad credit and previous judgments, if a renter pays, it is not a problem. As long as you stay on top of them, you will only lose one month’s rent before you evict or terminate their lease and get your unit back. That’s what a deposit should cover. With bad credit, if the renter leaves without paying rent, you will never get it. If they cause damages, you are stuck with the costs.
With a 600 – 650 credit score, the odds of a mortgage (and rent?) default are 31%. When you take that down to 550 – 599, the odds go well against your favor to 51%. Bringing a credit score down to 500 – 549 requires work on the borrower’s part, and you can predict a 71% default rate. Below 500, you have a 71+% chance of default. Remember, these are mortgage statistics. Rent is a lot easier so skip out on than a mortgage.
Do yourself a favor and eliminate a lot of work by creating a unit where desirable tenants want to live. Finding tenants with 700+ credit scores is not difficult. Getting them to sign a lease and live at your property is. That will start to change when you have good units, and good neighbors.
Can you tell us which service do you use to screen the applicants (e.g. Mr LANDLORD etc.) both for credit and previous rental and criminal history?
I use a company called mccgrp.com. There are many others that work, but you want to make sure you run a credit check, a county level criminal check for all address on the credit report for the past 7+ years, a past landlord check, and a employment check. Do not do these checks yourself. They cost me ~$40, which I get upfront from a tenant.
MCC calls the owners of properties on the tenants credit report. They know how to get information from employers. If not, they call the applicant to provider pay stubs, etc.
I have seen some property managers take an applicant moving into MN, and do a MN criminal check. The tenant has never even lived in MN, what good does that do? They then call the past landlords as indicated by the application. Bad tenants use their friends, good tenants you do not need to even call on.
Get used to using credit score as a major criteria if you have a ‘C’ or better rental unit. It is even more important for ‘B’ and better units.
I’m with you on the credit score front. Seems to me if someone has gone to all that work of maintaining their score they are going to be very unlikely to default on rent payment. It’s a lot harder to tell if they’re going to be a good tenant or not though – I guess looking at things like past addresses and other inquiries can help with that.
I write for a tenant screening blog called RentPrep but have never actually used their services. I do know they are growing substantially and seem to be very popular. I may have to check out MCC though since it seems like they provide more of a full service check.
Edit: I guess most companies(RP included) provide all of the above type services but it’s usually the most expensive option. Do you think that makes sense and if so who pays(you or tenant)?
Thank you for the comment!
Insurance companies have done a lot of research on the correlation between credit scores and risky behaviors. People with low scores have a tendency to do things that result in insurance claims. I see the in all the people I screen for the apartment complex too. Lower score people have many more parking tickets, speeding tickets, DUIs, etc.
It is a higher fee for a background check company to do the county level checks, past landlord and employer checks. My checks cost me usually ~$40. If the person lived in multiple states, it’s higher. But If I am going to loan out a $100K apartment to them, I want to know as much as I can about them. An extra $20 for the checks, over and above just the credit check, is well worth it.
I charge $40 to the tenant upon submitting the application.
There is absolutely nothing to prevent landlords from entering false, ambigious or malicious information about a good tenant that has won a law suit aginst them.
Thank you for the comment!
Actually, most landlords cannot do anything to affect a tenants credit score, unless they get a judgment against the tenant, in a court of law. A very few exceptionaly large landlords, with 1000s opf units, subscribe to Transunion’s Rent Bureau service. Only there can a landlord put information on a tenants credit report.
So, if you pay your bills, you will have a great credit score. If you buy things, and do not pay for them, you get a bad credit score. It really is that simple. When you give up an entitlement mentality, you will succeed.
Just reading this now. For the record, my credit score is not very high but it isn’t because of bad credit. It is due to lack of credit on my part, and that is on purpose. I don’t want to be in debt.
But apparently that is a massive “ding” on my part, despite the fact I’m 39 years old with a wife and 2 kids and not simply a just starting out teenager.
While the percentages and all work for a lot of cases, as you would expect, it isn’t a one size fits all prospect either, as in our case.
Thank you for reading!
When you have no credit, you have no credit score. If you have a low score, it is from too much credit utilization or not paying bills.
You may be a great renter, but you are a huge unknown without a credit score. With a low score, you become a definite high-risk. Of course, one person’s low score is another persons great score.