With more people renting now than ever, you may be seeing an increase in applicants when you have properties become publicly available for rent. It can be difficult to narrow your choices down to find the perfect renter, but one strong tool in your arsenal when it comes to deciding on who you will be working with for the duration of your property’s lease is a credit check. Renters have come to expect to undergo a credit check as part of the tenant screening process, but for landlords it can be difficult to know what to look for. Below we’ll cover some things to look for in potential renters’ credit reports so you can protect yourself from bad tenant experiences.
- Negative Items
The negative items section of a credit report is one of the most important portions. Each item in this section should be read carefully, as they are all instances of late or missed payments or defaulted accounts. However, not all negative items are equal, and each should be judged on its own merit — or lack thereof.
- Medical Accounts: Most businesses, and many landlords, choose to not judge medical accounts in collections too harshly. These are often a result of medical emergencies rather than poor financial judgement.
- History: Each of these items should have a date associated with it. If most of the negative items took place many years back, the potential tenant may have turned their financial life around or have simply hit a rough patch in the past and could still prove be a good tenant.
- Chronic Late Payments: Being late once or twice on a payment usually isn’t a big deal, but chronic late payments can be a major red flag of a tenant that might bring you trouble.
- Bankruptcies: A bankruptcy can be a sign of a rough patch, or it can be an indicator of someone who attempts to spend above their means. One bankruptcy can be forgiven, but if there is a pattern of multiples, reconsider making an offer.
- Foreclosures and Evictions
Because you are assessing the credit report as the person’s potential new landlord, problems with past living arrangements warrant special attention. The two main problems that will show up on credit reports are foreclosures and evictions.
A foreclosure is when a person’s property — in this case, usually a house — is repossessed by the financial institution that put up the loan when the property was purchased. Foreclosure is a long, drawn-out, expensive process, and so it is usually used as a last resort when a person has been unable or unwilling to pay their loan payments for quite a while. While this can be a sign to proceed with caution, it is not unusual for people going through foreclosure to turn to renting as a cheaper living situation, and they may be able to afford rent payments with no difficulty if they are cheaper than the mortgage payments they were previously paying.
An eviction, which you may have had to handle in the past as a landlord, is when a renter’s lease is terminated by a landlord. This can be due to problems on the landlord’s end, but is most often done because of nonpayment. Even one recent eviction should put you on your guard, and multiple evictions on a credit report are a sign that this tenant would likely be trouble.
- Amount of Debt
The last important thing to look at on a credit report is the lines of credit they currently have open and the level of debt they owe altogether. As a part of your tenant screening process, you likely already know their income. Compare this to their current debt and monthly payments — if a large percentage of their income is already committed to paying down past debts, that’s a sign that they may have trouble keeping up with rent on top of those obligations.