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Property Management Blog

Credit Checks

Credit Checks

We frequently get asked by both tenants and property owners about what we check when we’re doing tenant screening. We do the most thorough check available, which includes: credit report, eviction search, criminal background, prior addresses, employment, aliases, the sexual predator’s list, and the terrorist watch list. So which of these items is the most important?

Many people think that the credit report is the most important item. And that’s true for certain types of creditors. If you’re a bank screening someone who’s applying for a credit card, the credit report is of the utmost importance, because you’re offering someone a revolving credit line that isn’t backed by any collateral. Seeing a long history of paying on time to other revolving credit accounts is very important. But rental property is a little different. You’re collecting a security deposit upfront, you have the tenant’s banking and employment information, and the court system works relatively quickly to get you a monetary judgment to garnish wages and bank accounts if the tenant doesn’t pay you.

So, while the credit report does give you some information, it’s not really your best source of information. For example, a prior homeowner who lost his home to foreclosure after the 2008 housing crash will have an atrocious credit score. But, that person may have only lost the home because he had an exotic mortgage with a rapidly increasing variable rate. We come across many prior homeowners in this category. They got their exotic loans back in the days when you could always expect to refinance when the adjustable rate jumped too high, and they never expected those days of easy financing to disappear. Until they did. And then a lot of very high income earners found themselves in trouble because they bought more houses than they could afford without that exotic loan.

Is such a person likely to be a bad tenant? Nope. They’re some of the best, in fact, because they tend to have very high income. They just have a horrible credit score.

So how do you screen to find the best tenant without weeding out people who shouldn’t be rejected? Our primary item is eviction history. Someone who has been evicted before is almost always going to have to be evicted again. It’s best to toss these applicants aside and move on to the people without that checkered history. Next, we look at income. We require at least 2.5 times the monthly rent in income. We insist upon documentation of the income and never take a tenant’s word for it, and never accept verification by phone call. It’s easy for a tenant to get a friend to play their boss on the phone to “verify” their income. We require actual pay stubs, or for self-employed tenants, actual tax returns. Next, we check rental history. We get a report from prior landlords about how many times the tenant paid late, if they damaged the property, etc. Then we go to the credit report. The score can be deceiving, as discussed above, so we’re looking at the details. We’re looking to see if any accounts are in collections, we’re looking for prior landlords who are still owed money, and we’re looking to see how much the tenant has to pay each month to revolving creditors. Someone who pays half of their monthly income to creditors is not a good candidate. Then we get to criminal background. Some states are moving towards outlawing criminal background checks for tenant screening. Thankfully, Georgia is not one of those states. We can, and usually do, deny applicants with criminal backgrounds. The exception is non-violent drug offenses, which we’ll sometimes look past if they occurred long enough ago. And finally, anyone on the sexual predator’s list is immediately disqualified.

Using this method, we have eviction rates that are about half the national average. Obviously, it’s a lot of work to screen tenants when you sometimes receive a great number of applications, so this is one of those areas where having a reputable management company working for you is a big benefit. Give us a call and we’ll talk to you about what we can do to find you the best possible tenant.