How to Screen Applicants like a Pro, Part 1: Verifying Credit Reports

In this series, we’re showing landlords how to screen applicants like the professionals do. The first thing we’re looking at is how to professionally verify credit reports.

Many landlords (and even some property management companies) just use credit summaries - but these rarely tell the whole credit story! For example, it’s possible for reports to be inaccurate, perhaps due to undiscovered mistakes or fraudulent activity. Or simply, the report might not have enough credit activity to evaluate sufficiently (a.k.a. A “Thin” credit file), therefore, resulting in a lower score.

There are also hundreds of credit scores on the market. Just the common FICO score already has multiple versions of it, then there’s VantageScore, which is becoming increasingly popular, and there are also different scores in each industry, as well as variations depending on the data from the credit bureau (and there are 3 credit bureaus!).

So it’s always a good idea to obtain, review, and verify full credit reports of a prospective tenant. You want to dig deep into their financial history to accurately evaluate their behavior and habits. If their full report shows that they manage their money well, then they will most probably pay their rent on-time and consistently, as well. This will protect your investment property and help assure you of consistent income.

So how do you not just find, but verify the information in credit reports like a pro?

Follow the guidelines required by the Fair Credit Reporting Act and get the applicant’s permission to run the credit check. Pro landlords will include a clause at the bottom of the Application Form that grants them permission to do so. If you don’t have this and you’re already in the middle of processing an applicant, just have the prospective tenant sign and date a written document that allows you to run the credit check.

Once you’ve secured their credit checks from the agency, these are the things you need to look out for when verifying and screening the records:

1. Lack of enough credit history - One in ten adults has “credit invisibility,” or no credit history at all with any of the three nationwide credit reporting companies. A lot more also have “thin” credit, or barely any enough credit history to rent an apartment with.

2. Denied credit application - Many people have been denied an application for a loan or line of credit in the past. It may be because of "insufficient credit file," or inaccurate data in their credit reports. Either way, they’ve been under scrutiny before.

3. Identity theft or fraud - Identity theft is when the applicant is either using somebody else’s identity (usually someone who has way better credit history than they do!) to apply, or they’re the victim of identity theft themselves.

4. Charge offs - These are debts that have been deemed unlikely to be paid off by the creditor due to the borrower being significantly delinquent after a long period of time. It doesn’t mean the debt has been cancelled, but it does show that the applicant isn’t good with financial management.

5. Age of credit accounts - It makes a big difference if the applicant has had their credit score for 30 years versus 6 months. A long track record without any blemishes suggests that they’ll continue their good behavior at least in the near future - but vice versa says otherwise.

6. Account activity - This refers to any transactions made by the applicant such as bill payments and wire transfers. Generally, the longer the account has been active, the better it is for their credit score--especially for accounts with a positive payment history without any delinquency.

7. Unpaid accounts - Some of these might just be a credit card the applicant has forgotten about, but nevertheless, has forgotten to pay off.

8. Chronic late payments - If the applicant was unable to pay a bill by the due date. If they reach a month without paying the bill, it can last up to seven years on their record. Of course, this clearly shows that they are not responsible to meet payment deadlines.

9. Bankruptcies - The applicant might have filed bankruptcy to allow themselves some freedom from debts that their business has accumulated. However, it still means that they’ve miscalculated before and spent more than they should’ve.

10. Eviction history - Even eviction filings--those that did not push through as the renter eventually found a way to pay rent--are a big red flag. Having an eviction filed against them means they’ve been inconsistent with rent or have caused significant problems with their past landlord.

11. Judgments against - If the applicant has judgements against them, it means they’ve lost a lawsuit before and need to pay the winner a specified sum of money.

13. Any large amount of debt - Common forms of debt are: mortgages, car loans, personal loans, and credit card debt. If the applicant is managing the debt properly with low interest rates, this may not be as concerning. If their debt-to-income, or DTI, ratio is really high, however, this is a big red flag (we’ll be covering DTI ratios in our next installment of this series, so keep an eye out for that).

If you see any of these issues while screening their credit report, ask the prospective tenants about it first. Sometimes they’re just mistakes that they themselves aren’t even aware of. Or they have a good explanation for it--like a large amount of debt that’s actually for their start-up company.

If they can’t provide full written evidence of this explanation, however, steer clear. Don’t fall for an unverified sob story. Instead, verify their credit report to the best of your ability and make the best call to approve them or not. You can do this by:

- Contacting past landlords

- Checking past addresses and landlord names against property owner records

- Contacting previous & current employers

- Verifying applicant ID

- Finally, what do you do when you need to either approve or deny someone with questionable credit history?

Declining them - If you decide not to rent to them due to their bad credit, the Fair Credit Reporting Act requires you to submit an "Adverse Action" letter with certain steps to take.

Accepting them - If you are going to proceed with renting to them (even with their bad credit), you can legally require them to have an additional security deposit or a co-signer. Just make sure you provide the applicant with the “Adverse Action” letter that proves their bad credit as the reason for these additional requirements.

There you have it - you now know how to verify credit reports just like the pros do. Next week, we’ll be diving into another important part of the screening process: verifying an applicant’s ability to pay rent by looking at their income and current debts.

Have you had any experience dealing with questionable credit reports? Any tips to share on verifying credit information?

Image Courtesy of Andrea Piacquadio