“How To Check Your Credit Report Of Tenants” written by Mike Marko
Are you looking for a way to check a potential tenant’s credit?
The primary responsibility of a property manager is to find quality tenants to occupy their vacant property. You want tenants to follow the guidelines set forth by the lease agreement, maintain the property and most importantly, pay the rent on time.
Finding tenants who are diligent when it comes to paying rent is harder than one would imagine.
There are many reasons for this: insufficient source of income, wide array of necessary (and unnecessary expenses), or simply mismanagement of funds.
A credit check helps property managers gain insight on a potential tenant’s financial situation and history. It allows them to understand if any of the reasons mentioned above are applicable.
In this article, we will discuss how you can check your credit report of tenants conveniently in just 4 easy steps.
Key Steps to Check Your Credit Tenant Reports
Rent payments are the life and blood of any property business. This is why it is important to ensure that these are made on time or risk insufficient cash flow to run the business properly.
A tenant’s credit check can help property managers determine the prospective tenant’s capability to pay rent. Credit checks can also help in knowing if tenants are financially stable enough to rent the property.
There are key steps that can help you check your credit report of tenants. But first, what is a credit report and what is its purpose in the credit check process?
What a Credit Report Tells You
A credit report contains a credit score and a detailed fiscal history of all loans, credit cards, and payments made or not made of an individual. Credit reports also contain the other financial reports on monthly payments that the prospective tenant has made on time or late.
In short, when you check your credit for tenants, the credit reports can help you make an informed decision if the tenant is quality and pays rent on time.
Step 1: Set Your Standards
Processing applications fairly and thoroughly is a very important task for any property manager. For an applicant to follow a fair procedure, property managers can set their own standards and requirements.
Setting standards on a property can raise the tenant screening standard when it comes to accepting tenants. Standards can be based on the high credit score and excellent credit of a tenant.
The standards you develop and adopt for tenant screening will depend on the property’s level of demand and risk tolerance. The risk tolerance of the property helps determine if a long vacancy leads to a significant loss of potential rental income.
Step 2: Consider the Tenant’s Credit Score
The credit score is a combined score of factors from payment history, credit cards balances, and other financial histories that is assigned by the 3 major credit bureaus.
Aside from that, a credit score is also a three-digit number that takes into account all the credit history of an individual. A credit score determines if the individual has a good, average, or bad rating.
A good credit score 700+ or higher means the tenant is financially stable and responsible and will most likely pay rents on time. A bad credit score 650- or less means the tenant has a problematic financial health and could pay rents late.
Step 3: Evaluate the Tenant’s Credit History
A credit report is a detailed history. Usually, it’s how the individual has paid their responsibilities on their financial payment history reports.
The assessment of the credit history is valuable for property managers to decide whether to accept or reject the tenant’s application.
Tenants may have a period of bad credit history in the past but have now perfect credit history and scores. If you encounter such scenario, ask questions as to how it was resolved and make your decision from there.
Other Monthly Payment Obligations
Aside from income, knowing the tenant’s other monthly payments is important. This can help you determine their other financial obligations and if their earning potential is enough to cover all that.
Other financial obligations may include credit cards, student loans, auto payments, etc. Taking all of their payment obligations into account helps you determine if they can afford to pay the rent on time.
Red Flags to Watch out For
The credit report contains sections that show potential red flags in renting the property to the tenant.
Red flags would be periods of time the individual had bad credit reporting. These can also be defaults on loans or other financial assets.
Bankruptcy, Eviction, Home Foreclosure
Bankruptcy, evictions, home foreclosures are the main red flags to watch for. These are also issues the tenants will need to explain.
You can ask the tenants how they found solutions for managing finances and dealing with their property. This will give you a good idea of how they will deal with the property if you decide to rent to them.
Past Due and Discharged Accounts
Discharged debt is a court order that relieves an individual from paying it. A discharged debt is normally associated with a bankruptcy.
Past dues and discharged accounts impact your credit score negatively. If that shows up regularly on a credit report, the applicant has problems paying payments on time.
Chronic Late Payments, Debt
A large amount of debt and chronic late payments are a major red flag. Chronic late payments show a tenant may not be able to pay the rent on time.
This just shows that the individual has money flow issues which could affect their ability to pay rents on time.
It’s your responsibility as a property manager to make the rental property and the neighborhood safe. This is why it is important to check on past criminal records.
Make it to a point that there is no one residing in it who has a history of breaking the law. Evaluate past records based on the relevance of the offense, its frequency, recency, and legal considerations.
Step 4: Understand the Tenant’s Full Payment History
Even though certain sections of a credit report must be checked, an overall review is still necessary. You need to understand the full credit report and see the tenant’s side of the story.
Interviewing the tenant with a bad credit score may help fix credit report errors they may not be aware of. An interview can also help the applying tenant explain when a hard time has impacted their credit report.
Past health issues or job layoffs in the past, for example, are examples of valid reasons for bad financial situations. It also allows you to understanding why the individual may now be able to pay rent and bills on time.
Final Thoughts on How to Check Your Credit Report of Tenants
Although property managers have a wide array of responsibilities, the main one is to ensure that vacant properties will be taken over by a good tenant. Running a credit check on potential tenants during the application and screening process helps you sort the quality tenants from the bad ones.
In this article, we discussed how you could check your credit for tenants. This is needed to better understand a potential tenant’s financial background… and ultimately answer the question, “Are they capable of paying rent and other bills on time?”
When you check your credit report of tenants, you are protecting yourself from fraud and possible trouble in the future.
There are considerations that must be factored in when looking through a tenant’s credit check form: the standard you have set; credit score; credit history; other financial obligations, bankruptcy, eviction; and payment history.
All these factors help you determine if the tenant is financially capable of paying his or her rent on time.
If you have any questions on how to check your credit, share it with us in the comment section below.
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