Tenant screening is one of the most important responsibilities of any landlord. This is your chance to make sure your property is occupied by someone who’s going to take care of it, pay for it consistently, and ideally, stay there as long as possible.
You need to be careful in the tenant screening process, because any hint of discrimination could land you in hot water. However, there are several important factors that can (and should) influence your decision on whether or not to accept a new tenant. One of the most notable factors here is credit score—but just how important is a credit score as an indicator of tenant acceptability?
How Credit Scores and Credit Reports Work
When you receive a tenant application, you’ll likely gain access to their name and social security number, which can allow you to run a credit report with one of the three major credit bureaus. The tenant’s credit score is an overall numerical assessment of their financial history and reliability; it functions on a range from 300 to 850. In general, 300-579 is considered a very poor score, 580-669 is considered a fair score, 670-739 is considered a good score, 740-799 is considered a very good score, and anything 800 or above is considered exceptional. Roughly 21 percent of people have an exceptional credit score, 25 percent have a very good credit score, 21 percent have a good credit score, 17 percent have a fair credit score, and 16 percent have a very poor credit score.
Obviously, in a perfect world, you’d only select tenants with the highest possible credit scores. However, there are two main problems with this. First, only 21 percent of the population has an exceptional credit score. If you seek them exclusively, you’ll be automatically ruling out 80 percent of the population as prospective tenants. Second, people with very good credit scores often buy their own homes, as opposed to renting an apartment or unit.
If a prospective tenant has a “good” credit score, they’re only 8 percent likely to become seriously delinquent in the future. In other words, the vast majority of tenants in the “good” range or above (670 or more) will be financially reliable.
In addition to the bottom-line score, your tenant’s credit report will also contain other financial information that may be important to consider. For example, you may learn whether this tenant has filed bankruptcy in the past, how much debt they currently carry, and other factors. These factors should be taken in context with the other information you receive. If they have a low credit score, but don’t have any debt or delinquent accounts, it could be an indication that they haven’t been developing a credit score for a long period of time.
Overall, the tenant’s credit score and credit history should be taken into serious consideration when screening; however, these aren’t the only factors you should use in your decision.
Other Factors to Consider
A tenant’s credit history should be considered alongside these other factors, to provide more context and a better overall picture of the tenant’s reliability:
- Disposition and personality. You probably won’t get a sense of the tenant’s personality or disposition on an application, but you will have a chance to interview them. You may learn that this tenant has had a sketchy financial history, but has recently made a commitment to making improvements. They may be eager to improve their credit score, which means they’re going to be serious about making payments on time and in full. Conversely, you may find a tenant with a good credit score who doesn’t seem to care about their financial history, or seems flippant or apathetic about the property.
- You also need to look at what this person is earning. If they’re bringing in $2,000 a month reliably, and you’re charging $1,800 in rent, it doesn’t matter how good their credit score is; this person will be highly unlikely to afford rent payments in the long term. Many tenants will only apply to apartments they know they can afford, but you can’t rely on this, nor can you use someone’s credit score as a good indicator of their budget sense. Make sure this is a place your tenant can reasonably afford.
- Job history. Your prospective tenant may be earning plenty of money, but can you be sure they’re going to be earning that amount for the indefinite future? This is hard to predict, since any number of factors could cause them to lose their job or switch jobs. However, you do have a reliable indicator you can review: the length of time they’ve held this position. The longer your tenant has held a job, the more likely they’ll be to keep that job in the future. If they just got the job and don’t have much of a job history prior to it, take it as a bad sign.
- Criminal history. Criminal history is a divisive issue in tenant screening. A criminal record shouldn’t be a reason to immediately stop considering a candidate; however, if you’re leaning one way or another, this could be the “tipping point” factor. If a tenant has had a checkered past, and they don’t have a reliable job or a good credit score, it may be best to pass.
- Your tenant screening application will likely request personal references, so take advantage of them. Call up the people they’ve listed, especially if they’re current or former employers or former landlords, and see if you can get a feel for how reliable or trustworthy this person is. It may be the final piece of information you need to feel confident in your decision.
If you’re interested in becoming a landlord and making passive income from your properties, but you’re overwhelmed by the complexities of tenant screening and property management, Green Residential can help. Contact us today, and learn more about our tenant screening and property management services—all of which can save you time and stress while preserving your bottom-line profit.