A lot of information goes into screening a tenant but what are the key factors that are most important? Tenant screening is not about a great credit score, it’s about determining the renter’s ability to pay rent, to speak the truth and be upfront, and to manage their personal finances so that they can keep paying your rent. We sat down here at LeaseRunner and brainstormed nine key elements that should be part of your leasing decision but are often overlooked, and we ranked them in order of importance.
Verified sufficient income or proof of funds
Okay, that’s not surprising, is it? The potential tenant must have steady income or proof of funds available for the term of the lease. The income should be high enough to pay your rent, monthly payments, and have disposable income for other living expenses. This number shouldn’t feel tight.
Ease of communication
Is your potential tenant confused after you provide simple instructions, is he dragging his feet to complete the easy application process, or already making up stories? That will probably never change for the time of his tenancy. This subjective screening factor will not be delivered by a screening report you order, but will instead become apparent if you tend to read between the lines of communication with the applicant.
Use your gut feeling when it comes to choosing the applicants to screen, to select the appropriate screening reports, and to make your final decision.
Does your applicant keep a cushion in her bank account or does she bounce checks once in awhile? If you see the cash trend reaching zero in her checking account every month while the savings account balance remains with the minimum balance allowed, your potential tenant may be living hand to mouth. This could be good and bad.
The good:You know that she is not saving any money to purchase her own home so she is here to stay.
The bad: She doesn’t have any reserve for unexpected life events like sickness or unemployment. Unless the reserve sits in a different account...
The ideal:If your applicant maintains a cushion of three months salary in her bank accounts and has a slow positive cash flow, you know she is working toward some savings goals. But until her goals are achieved, you get to enjoy a solvent, responsible tenant.
Total monthly payment is another item that has to be looked at closely and is not black and white. Your applicant may easily afford your rent, other monthly payments, and living expenses, but you should drill down into the details to find out how they may be financing these monthly payments.
As you know, the minimum monthly payment on revolving accounts (credit cards) is fairly low and the interest rate is fairly high, so it would take quite a while to pay off a credit card debt, especially if the balance is substantial. Because of that, most people (not only tenants) pay off revolving debt every month before it starts accruing interest. If the balance is somewhat low (not higher that the applicant’s income), it’s safe to conclude that this balance is being paid off in full every month and the monthly payment doesn’t apply.
It is the installment loan type that makes up most of the tenant’s monthly payments. This can be a student loan, car loan, or a mortgage.
The mortgage however might be a separate category. Most applicants will not have a current mortgage, but if your applicant does he might also be a landlord and the mortgage is effectively being paid for by his tenant. Fingers crossed that they did the same due-diligence as you and picked the right tenant who consistently pays their rent on time. However, if you see a mortgage on your applicant’s credit report, be sure to ask about the details. They might be splitting from their partner and remaining responsible for the mortgage amount so don’t jump to any conclusions here without addressing this with your applicant directly. In addition, you will get a hint when you look at all open tradelines (credit accounts) and the mortgage is a “joint account.”
The number of late payments is an indication of your prospective tenant’s willingness and ability to pay bills on time. The credit report will show the number of total late payments in the last seven years, so don’t be surprised if you see some late payments. While it’s normal to see a few late payments over a seven year period, once the number of late payments reaches double digits you may have a “serial forgetter” on your hands. You can then analyze the late payments even further:
30 days late indicates your tenant really just must have forgotten to make the payment on time.
60 - 180 days late indicates that your prospect perhaps got into some financial trouble. And because history often repeats itself, make sure the tenant you are about to accept now keeps at least a three month cash reserve in his bank account.
Judgments, Liens, and Bankruptcies
If any of these appear on your applicant’s credit report, it means your applicant owed someone some money and the situation took a legal spin instead of just going to collections or being charged off as bad debt. Check to see if there is still an outstanding amount and if so, include it with the applicant’s liabilities that she will have to pay while making your rent payments.
We put the criminal record toward the bottom of the list because criminal records are fortunately rare. If there is a serious criminal record then it gets moved to the top of the ranking. Renting to a tenant with a serious criminal background becomes the landlord’s liability. For tenant screening purposes, only criminal records that were active within the past seven years will appear in the criminal records. By active, we mean the last update to the criminal record was made as long as seven years ago.
Sometimes, the eviction record can serve as a lie-detector test. Is your applicant telling you that she was never evicted before, but then you discover that there is a recent eviction record? “Oh yes, I was a co-signer on my friend’s lease and she ended up being evicted.”
Well, does the eviction address match any of the previous addresses listed on her Credit Report? If so, she may not be honest with you.
Since you’re not interested in hearing stories that she mailed you a rent check on the 1st and it must have gotten lost in the mail, you are best to seriously consider the circumstances surrounding any eviction records.
This is another check if the applying renter is being forthright with you. Do his previous addresses from his rental application align with what is on the credit report? The addresses from his credit report are gathered from postal records when there is an address change or when the applicant updates his address with his creditors, so all addresses listed on the credit report should be considered legitimate.