Savvy landlords understand the importance of screening tenants before approving them to rent your property. With a simple application and a bit of due diligence, you can filter out any applicants who don’t have steady employment, who can’t afford your rent, or who present other significant concerns. You’ll be left with trustworthy, reliable tenants who pay their rent on time. One of your best assets in this endeavor is a tenant’s credit report, which will tell you tons of information about this person’s financial background and fiscal responsibility.
But why are credit reports so valuable? And what should you be looking for when reviewing one?
The Importance of Reviewing Credit Reports
Credit reports are your best glimpse into the financial history of a given tenant. If you’ve calculated your cap rate, you know that your profitability is almost entirely dependent on your property remaining occupied and your tenants continuing to pay rent in full. Any break in that continuity is going to result in decreased profitability – and potentially, losses.
A simple credit report can’t tell you what a tenant will do next with their life, but it will inform you about the behaviors a tenant has practiced in the past If they have a sketchy history of payments, or if they have a lot of debt, it could be a sign that they’re not ready to rent this property from you.
Key Points to Examine
There are several individual items you should evaluate when looking at a credit report.
- Your overall score. First, you’ll want to look at a person’s overall credit score. This is a credit agency’s best evaluation of a person’s previous financial habits and current financial standing. The higher the credit score is, the more trustworthy and reliable this person is regarded to be. FICO scores range from 300 to 850, and any score above 670 is considered to be “good.” Lower scores are an indication of problematic events in a person’s financial history or poor financial standing, such as excessive debt, missed payments, or late payments. Because a credit score is derived from many different individual elements, it shouldn’t be considered in a vacuum; it’s important to delve deeper and attempt to figure out where this score came from.
- Payment habits. One of your top considerations should be this person’s payment habits. A credit report will tell you how this person has made payments to their accounts in the past. Delinquent payments and missed payments will be noted, as well as the date of first delinquency. The fresher and the more consistent missed payments are, the more you should be concerned about them.
- Current debts. You’ll also want to look at this person’s current debts and financial obligations. If they already have thousands of dollars in credit card debt, auto loans, and personal loans to pay off, they may not be able to afford making your rent payments, especially if they don’t have much income.
- Rental history. In a credit report, you’ll also be able to see current and previous residences, and you’ll get information on whether this person was diligent with rental payments in the past. If they were ever evicted from a property, or if they’re chronically late with rent, you should be concerned.
- Open accounts and closed accounts. Most credit reports will provide information on both open accounts (those with revolving credit, like a credit card) and closed accounts that could be paid in full or standing with a balance due. These accounts are slightly different and should be considered differently.
- Past bankruptcies. Landlords will also be able to discover whether a tenant has filed for bankruptcy in the past 10 years. A history that includes bankruptcy is usually a troubling sign, but discharged and old bankruptcies aren’t as big of a concern.
What Qualifies as a Dealbreaker?
So what qualifies as a dealbreaker? Is there a red flag on a tenant application that should automatically disqualify an applicant from consideration?
The short answer is no. There are many red flags that, in total, should give you cause for concern – but there may be enough positive factors to outweigh them. For example, let’s say you have an applicant with a low credit score and a history of missing payments – but most of their missed payments were from several years ago. They currently have a great job that they’ve held for a few years, excellent references, and plenty of money to cover rent. For many landlords, this would be a tough decision – not an automatic disqualification because of a few questionable factors.
Always run credit checks on your tenant applicants before approving them to rent your property. From there, you’ll need to use your best judgment when reviewing the applications and making final decisions.