Credit Report Tips for Screening Tenants
First to comment on the use of credit reports overall for screening tenants. It should never be the only criteria to use to screen for a tenant's ability to pay rent. Here is a good example, say someone has a FICO Score of 802 but only makes 2400 per month in income. If they want to rent a home for 1800 per month that would only leave 600 per month left to pay all their other bills. You may say, well why would they apply to rent a home they could not afford, they should know what they can handle. Think about how many homeowners went into foreclosure because they bought homes they could not afford to pay the mortgage. The same applies to renting. Please be careful not to put too much weight on a credit report when selecting a tenant. They are valuable but do not use them exclusively to make your decision.
Credit reports have 4 areas that we look at to try to evaluate when determining if someone is financially sound. First is an overall total of how much debt they have, how they pay their monthly bills, whether is there anything in the collection, and their credit score.
It is always good to know how much overall debt they are liable for. Look for credit card balances, student loans, car loans, etc. Try to figure out what their monthly payments are on all the outstanding debt and take that into account when evaluating their monthly income vs. the monthly rent.
Second and very important is their pay pattern. Most credit reports will give you the pay patterns of their monthly bills. You want to make sure their monthly bills like their utility payments, car payments, and credit card payments are paid on time. Most credit reporting systems will give you a 24-month tally of their monthly bills and when they were paid. If they are paying their monthly payments late they will probably pay their rent late.
Next is collections. You may say yikes this guy has bills in collection, we should reject him. Not so fast, take a close look at how much it is and what they are. If it is mostly medical bills you may consider ignoring them. Even the responsible banks will sometimes ignore medical bill debt when evaluating loan qualifications. What you want to look for here again is to see if any of their monthly recurring bills are in collections, utility bills, car payments, etc. Don’t get too hung up if they have bills in collection, look deeper and see what it actually is.
Finally, look at the credit score. First of all, make sure you are looking at a FICO score. There are other organizations that produce scores that may look like a FICO score. FICO scores range from 300 to 850. There are other scores that have different scales that can be very misleading. Make sure the score you are looking at is a FICO score and not something else. If you find someone with a 700 score or better you can probably ignore the other 3 areas and assume all is good. The problem is that you will not likely find those folks applying for your rental. You will need to focus on the other 3 areas and try to figure out why the score is low.