Although screening tenants is an easy process, it is the decision-making that can cause head scratching. It’s great to be in a competitive rental market and have a lot of tenants to pick from, but choosing a tenant is not always easy. You may have to dig into the details when you have a few qualified tenants with sky-high credit scores, and the same is true when you have applicants that meet your qualifications but don’t necessarily knock it out of the ballpark with credit scores and income.
Here are some ideas on what to look for when deciding on your next tenant.
A credit score reflects the activity in the tenant’s credit file, so a credit score of less than 600 should make you cringe. But still, it’s important to understand what caused such a poor credit rating for this applicant. Was there a lot of delinquencies, or did a few late payments in a very limited credit history time frame cause the trouble?
Current Past Due Amount
Given the fact that an applicant will have to pay a security deposit and the first month’s rent, it’s concerning to see any outstanding past due amounts on the credit report. It’s understandable that from time to time there will be a late payment on a credit card payment, but you may want to “deduct points” from this applicant when the past due amount equals or exceeds the rent amount. After all, if the applicant cannot pay his creditor, how is he going to pay your rent?
Total Monthly Payment and Income-to-Rent Ratio
Is your applicant’s monthly rent, combined with their minimum monthly loan payment on all credit accounts too high so that it eats up their disposable income? At least 30% of the tenant’s income should be left for other expenses besides their rent and loan payments. So, even though tenants may be driving expensive vehicles, they may not necessarily be able to afford your rental property.
Number of Late Payments & How Late
If there were no such thing as a credit score, the number of late rent payments could easily take its place. It tells so much about the applicant and it reflects on the credit score. Typically you want to see the number of late payments in the single digits, if at all.
Closed Accounts with Balance and Collections
If you’re on the fence about accepting or declining an applicant, take a look at the closed accounts section. Were all of the accounts paid off or were some charged off as bad debt? When you see a balance on any of the closed accounts, the final verdict may have to be DECLINE.
Maintained Cash Balance
Generally, it’s good to see a cushion in an applicant’s main bank account that is maintained for the entire month, whether it is in their checking or savings account. Tenants in most cases don’t keep $30K of cushion in their bank accounts, but a balance of several thousand dollars can provide a level of comfort about the lease.
Periodic Payroll Deposits
This is a great piece of information that verifies the renter’s employment and net income at the same time. Look for deposits at the same time of the month, not sporadically.
Has the prospective renter spent more than he has brought home in the last three months? This could be an important piece of information. Everyone makes big purchases once in awhile so the cash flow may not tell the full story behind the applicant’s spending habits. Also, beware of bank transfers from checking to savings and vice versa. Keep in mind that the last three months of cash flows include the tenant’s previous housing expenses.
Name on the Account
Did the applicant used her own bank account information? The name on the account is pulled from her bank so it can serve as additional identity verification.
The criminal records will pull criminal records that were active within the last seven years. You may wish to omit any vehicular charges. Most landlords do not accept any sex-offenders if the physical appearance matches their applicant. The criminal report may include matches that are false positives because the matching system uses a different type of logic to match a name with a bona fide record. In most cases the system is trying to warn landlords about a possible match to the sex-offender registry, thus allowing the landlord to eliminate the record when the physical description does not match their applicant.
You may not care if a tenant was evicted five years ago but you certainly will care if the tenant was evicted last month. Obviously, the individual’s situation changes and a previously evicted tenant five years ago might make a great tenant today. But it’s safe to say that a tenant evicted last month will likely continue having trouble. You would also be wise to compare the eviction address with the last three addresses listed in the applicant’s credit report. This is another confirmation that this eviction record belongs to the applicant, unless the applicant lived at multiple addresses since then.