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How to Run a Tenant Credit Check

Before you sign any contracts with a new tenant, you need to know if they’re going to pay rent on time every month. While there’s no way to actually tell the future, running a tenant credit check can give you valuable insights into a person’s financial habits. Gathering this information is an extra step that will protect you and your property in the long run. Try to find a professional property manager who will find you a good tenant or who will help you to avoid such situations.

A good credit history indicates good habits like paying bills on time, which translates to you receiving rent on time. On the other hand, a poor credit report will show red flags you wouldn’t otherwise know about, like a past bankruptcy or high debt-to-income ratio.
This article will outline the process of running a credit check for landlords from start to finish.

How Landlords Can Check a Tenant’s Credit Report

If this is your first time doing a landlord credit check, you don’t need to worry. The process is very straightforward. Once a prospective tenant has submitted a lease application, follow these simple steps.

Step 1: Verify the tenant’s name, current address, and employment.
Before running any sort of credit check, you need to make sure to confirm the accuracy of your tenant’s identity, employment, and current address. You can do this by comparing their driver’s license to the name and address listed on their application form. To verify employment, you may ask to see a pay stub or W-2 form. Self-employed tenants can prove income by showing recent bank statements.

Step 2: Get permission to run a rental credit check.
This is a very important step, as you must follow the Fair Credit Reporting Act as a landlord. Before running any credit checks, you must get the tenant’s express written permission to do so. You can include this agreement on the bottom of the lease application form, or you could provide a separate document to sign. If you are unsure about legal terminology, you should consult a lawyer.

Step 3: Choose a credit reporting agency.
Depending on what information you are looking for, different agencies will provide slightly different reports. The major credit reporting bureaus will include a credit score, although these services may charge a higher fee. You might want to go with a slightly different service where the tenant takes care of submitting the information and also pays the fee. These other screening services will provide similar financial reports.

Step 4: Get approved as landlord for the tenant credit check.
Before you can run a landlord tenant credit check, the reporting agency must verify your identity and your status as landlord. This requires proof of identity, residency, and ownership of the rental unit.

Step 5: Run the report!
Submit information about the tenant from their lease application. See below for all the information you need to run the credit check.

Step 6: Review the report and look for red flags.
Use the results to inform your selection of a new tenant. Remember to be fair and equitable in your screening of prospective tenants. It is illegal to discriminate by only running credit checks for certain tenants, or by requiring higher credit standards for people in a racial or ethnic minority class.

Note: If you are working with a property management company, you still need to be the one to order a credit report, as the agency will need to verify your identity and ownership of the property.

 

How to Run a Tenant Credit Check

What Information is Needed for a Credit Check?

There are three main bundles of information you need in order to run a credit check for future tenants:

  1. Verification that you are the landlord
  2. Completed rental application from each prospective tenant 18 or older
  3. Permission from each tenant to run credit report

Let’s break it down:
Information about you, the landlord, that is required before you run a credit check:

  • Proof of residence: This can be a document like a utility bill to verify your current address.
  • Proof of identification: This is as simple as your driver’s license.
  • Proof that you own rental property: This can be a deed, insurance bill, mortgage statement, utility bill, proof of title, or purchase agreement.

 

Required information about tenant from their application:

  1. Tenant’s full legal name
  2. Social Security Number (or their ITIN, Individual Tax Identification Number)
  3. Date of birth
  4. Address(es) for past 2 years
  5. Current employer
  6. Current landlord

You also need written consent from the tenant. It is popular to include a credit check agreement as part of the lease application process. It’s a good idea to work with an attorney for proper legal language on consent form.

How to Run a Tenant Credit Check

Where to Get a Tenant’s Credit Report

There are three major credit bureaus which offer full credit report screening services.

  • Equifax
  • TransUnion (SmartMove)
  • Experian

These three will include a credit report as part of the full screening service. They charge a fee to the landlord, usually between $25 and $75.

There are other services online that provide similar screening without the credit score information. These are usually free for the landlord, charging the tenant instead. Some tenants will prefer this service, since they can submit their own sensitive information without having to pass it through your hands.

Make sure the agency is reputable by doing some research before submitting any sensitive information.

How to Handle Fees

Credit reports often charge a fee. It’s up to you, the landlord, to decide who pays. You have options:

  • Charge the tenant the credit check fee.
  • Charge the tenant an application fee at the beginning of the process.
  • Pay it yourself as a business cost (the tenant will appreciate you for this).
  • Charge the tenant, but discount it back in next month’s rent or in security deposit if you end up signing the lease with them.
  • Wait to run a credit check until the tenant has expressed major interest in the unit (and has completed paperwork and paid deposit). This will reduce the number of credit check fees that will need to be paid.

Note: In the state of Wisconsin, if a tenant provides you with a credit report that has already been run, you may not charge them a fee for a new credit report.

How Long Does a Tenant Credit Check take?

Once you have all the required information, the actual credit check doesn’t take very long. It takes a few days to get approved to run a report, somewhere between two and ten days. Once you run the report, you can expect to get results within a day. Some agencies send the report within an hour.

How to Run a Tenant Credit Check

What to Look for in a Tenant’s Credit Report

The credit report will look back seven to ten years into the tenant’s financial history. It will provide you with a clear picture of their habits and trends, both good and bad.
As you review the credit report, look out for these red flags:

  • Chronic late payments for things like student loans or car payments. “Chronic” is key here. One or two late payments five years ago are not worth worrying about.
  • Unpaid accounts
  • Bankruptcies
  • Eviction history: Depending on your state laws, you may or may not have access to this information.
  • High debt to income ratio, or large amounts of debt: If a tenant’s monthly income is already tied up in predetermined payments, they may have a hard time paying rent if an emergency comes up.In case of any red flags, your best option is to talk to the applicant and ask about it. A credit report doesn’t take context into account, and many potential red flags could end up not being an issue. For example, someone’s spouse (or ex-spouse) may have screwed up their credit with excess spending. Also, someone might have had past financial hardships but have been working hard to turn it around.

Turning Down Tenant Because of Bad Credit Check

If you decide to turn away a prospective tenant because of a bad credit check, you must follow some specific steps as outlined in Fair Credit Reporting Act.

Send them an “Adverse Action” letter or email. Explain that you have rejected their application because of their bad credit report. You need to give exact reasons.
In the letter, include information about the reporting agency you used to file their credit report, including their name, address, and phone number.
The applicant has the right to request a copy of the report within 60 days; it is your responsibility to inform them of this right.

Accepting Tenant Despite Bad Credit

You may decide to accept the tenant’s application despite red flags on their credit report. If so, it is within your right to request a higher security deposit or a co-signer for the lease. However, in order to do so, you must provide a similar “adverse action” letter to the tenant. This letter must explain that you have chosen these extra requirements because of the results of their credit check.

Final Thoughts

As a landlord, it is in your best interest to run a credit check on your new lease applicants. The information in these reports allows you to make a well-informed decision on who to accept as a new tenant on your property. By taking a little extra time and effort to go through this process, you will protect your financial investment and make more money in the long run.