Landlording & Rental Properties

The Compleat Tenant Screening Process: Credit Check & Background Check

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The first installment of “The Compleat Tenant Screening Process” took an in-depth look at pre-screening (in addition to explaining what is meant by the word “compleat”). The second covered everything that should be included within an application.

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It’s time to talk about the part of tenant screening that involves credit checks and background checks.

First up, the credit check.

How to Examine a Credit Report

The first and most important thing about credit reports is always pay for your own copy of every applicant’s credit report. Assume that if an applicant provides their own, it has been heavily edited—just don’t even look at them.

Considering the Credit Score

An applicant’s credit score is fairly straightforward and easy to understand, so a lot of landlords default to it. But in reality, it’s not the best way to measure someone’s financial ability.

More specifically, while a good credit score is usually a solid indicator that someone has the financial ability to pay rent, a bad credit score is not good evidence that they don’t have the financial ability to pay rent. (This is especially true in a market like the city of Detroit, where I work.)

For example, take a tenant who lost their job a couple of times due to reasons beyond their control (i.e., layoffs) and therefore missed a bunch of bill payments while they struggled to find a new position. This person may have been a loyal and valued employee for a couple of years since then yet still end up with a credit score that is low. That doesn’t necessarily make them a huge risk.

It’s this kind of situation that makes it absolutely mandatory to examine every applicant’s:

  • Financial Summary
    • The financial summary consists of two parts:
      • Public records
      • Creditor information
  • Public Records
    • There are four important kinds of public records that show up on a credit report:
      • Bankruptcies
      • Liens
      • Garnishments
      • Judgments

All of these are relevant and deserve further inquiry and written explanation. Generally speaking, no one of them should be an absolute deal-breaker, but if there’s a pattern evident in the records, it might be.

Related: Tenant Screening: The Ultimate Guide

Interpreting Creditor Information

This is the real meat and potatoes of a credit report. This section lists every single open account and usually goes back seven years on closed accounts.

Each account listed includes details such as account status (current/open, closed, charged off, etc.), balance, credit limit, date of last payment, and more.

Accounts are divided into “adverse” accounts, those in which a missed (or in some cases even late) payment or payments have occurred, and “satisfactory” or “in good standing” accounts, those in which have been paid off entirely on time.

Look for:

  • Accounts that were never paid off and were instead closed with a balance or sent to collections
  • Accounts that were often paid late (look for entries like “CURR WAS 30-7,” which translates as “is now current, but was 30 days late seven times between being opened and today”)
  • Collection accounts, where each represents a time when a debt was sold to a different company (meaning the company that once owned it deemed it uncollectable and decided to take a loss rather than hold onto the debt)

Now, it’s time to talk about the other kind of tenant screening check: the background check.

Criminal background check application form with glasses and ballpoint pen.

Related: 5 Tips to Handle (& Prevent) Tenants From Hell

Background Checks

A thorough background check will verify the tenant’s name and identification number (typically their Social Security number), as well as confirming any prior evictions they’ve undergone and criminal history on their record.

For landlords who are spoiled for choice, the existence of even a single “viction”—whether of the “e” or “con” variety—is enough for them to drop any applicant. In Detroit, that doesn’t fly, so we have to look more carefully.

When Does an Eviction Really Matter?

There are lots of reasons that a person can get evicted—some are obviously problematic, while others are less so. The problem is that there are legally only a handful of broad categories of eviction (which vary according to state law). However, the list is usually very similar to this:

  • Nonpayment of rent
  • Breach of lease
  • Squatting
  • Creating unsafe/unhealthy conditions
  • Using a property for illegal purposes

Nonpayment is usually a big deal, but sometimes it was clearly a one-time situation that is now resolved.

Breach of lease might be something really minor where a landlord overstepped their bounds. But it might also be a meth lab, so you have to ask the prior landlord.

Squatting, similarly, is usually a HUGE red flag, but it’s worth investigating because occasionally people do get accused of squatting for illegitimate reasons (like when the rental property owner was foreclosed on).

Obviously, any eviction for creating unsafe/unhealthy conditions or for illegal usage is a huge red flag.

When Does a Conviction Really Matter?

Honestly, if it’s not for stealing (in any form) or a pattern of violent crimes, it usually doesn’t. Refusing to rent to someone because they made a single poor choice five years ago is just silly.

Here’s what you need to consider when you’re examining an applicant’s criminal history:

  • How long ago was it? Older crimes are much less likely to be relevant.
  • How often did it happen? A one-time crime can be overlooked; a history of even minor thievery should not.
  • How major was it? Punching someone in the face is a crime, but it’s not one that should keep you from living in a rental home. Cracking someone’s skull open with a tire iron might make you want to reconsider.
  • How relevant is the crime? Getting busted for possessing marijuana is bad, but it’s not nearly as important to you as a landlord as, say, arson. 

A final note on crime

The last thing to keep in mind regarding criminal history is that some applicants might be strictly forbidden from living in some houses due to their criminal past. For example, some categories of sex offender aren’t allowed to live within a certain radius of schools.

Conclusion

So, that’s everything you need to know about tenant screening checks! And in fact, that’s everything you need to know about tenant screening en toto, as well.

Would you add anything to this three-part tenant screening guide?

Let’s talk about it in the comments.

While in the mortgage business, Drew rose to a VP position at the first broker he worked for and then started his own company. In the pursuit of excellence, he obtained several mortgage designations and joined mortgage & several affiliate association Boards. He also did WebX presentations and public speaking. It was during this time he started personally investing in single-family rentals, leading him to also start Royal Rose Property Management with two partners. He also joined the Board of a local real estate investors association, eventually becoming its President. The real estate crash led to an offer from the banking industry to manage a Michigan bank’s failed bank assets they acquired from the FDIC. The bank acquired four failed banks from the FDIC, increasing from $100M in assets to over $2B while he was there. After that, he took over as President of Royal Rose Property Management. Today, he speaks at national property management conventions and does WebX presentations.

    Katie Rogers from Santa Barbara, California
    Replied 6 months ago
    “Breach of lease might be something really minor where a landlord overstepped their bounds.” Thanks for acknowledging that it is possible for the landlord to be the problem, not the tenant.
    Drew Sygit from Birmingham, Michigan
    Replied 6 months ago
    @KATIE ROGERS: we try to stay open-minded about everything we can:)
    Erin Spradlin Real Estate Agent from Denver, CO
    Replied 6 months ago
    Excellent article. First, I think people have a fear of becoming a landlord, when my own experience (and those around me) has mostly been positive. Second, I like your last point about not discriminating against someone that made a mistake 5 years ago. We rented to someone that had a ding on his background and just asked him to pay us 1.5x the deposit upfront. He ended up being a model tenant, occasional dog sitter and is now marrying one of our good friends!
    Drew Sygit from Birmingham, Michigan
    Replied 6 months ago
    @ERIN SPRADLIN : what a great story! Thanks for posting:)