What Is Credit Screening?

What Is Credit Screening?

In order to maximize cash flow in your investment property, it is essential that you keep your rentals filled. However, even more important than finding a tenant is finding the right tenant. An effective tenant screening process requires you to gather a variety of information, including financial and credit data. What is credit screening and how can it help you identify the ideal tenant for your rental property?

What Is Credit Screening and Why Should It Be Part of Your Tenant Screening Process?

Credit screening is the process of gathering information from credit agencies and public records in order to verify submitted information and look for red flags so that you can properly evaluate the financial stability and reliability of potential tenants. Credit screening can provide information like the following:

  • Verification of Information: A credit screening report will allow you to verify information like name, Social Security number, date of birth, and previous addresses.
  • Credit History: This gives you the opportunity to see if there are outstanding loans or credit card accounts or a history of non-payment that could make the potential tenant a poor risk.
  • Public Records: Public records include bankruptcies, evictions, and other indicators of non-payment or poor use of credit.
  • Other Credit Inquiries: It is useful to see if a large number of other landlords have run credit reports or if the tenant is taking out other loans or repeatedly applying for credit cards.

What Information Do You Need In Order to Run a Credit Screening?

Once the applicant has given written permission for a credit screening, you will need to gather the following information:

  • The full legal name of each adult on the lease
  • Addresses for at least the past two years
  • Social Security numbers for each adult on the lease
  • Dates of birth for each adult on the lease
  • Current employers for each adult on the lease
  • Current landlord or property management company contact for each adult on the lease

Credit Screening Do’s and Don’ts

Ensuring a smart tenant approval process starts with understanding the logistics involved in a credit screening as well as the value of other determining factors in deciding whether or not your potential tenant is a solid risk.

DO

  • Get written, signed, and dated permission from a potential tenant to undertake a credit screening process.
  • Decide whether to charge a fee for the screening, waive the fee, or deduct it from first month’s rent upon approval.
  • Ensure an identical screening process for all applicants in order to comply with Fair Housing requirements.

DON'T

  • Rely on a self-reported credit score from your potential tenant.
  • Ask your mortgage lender to run a credit report for tenant screening.
  • Automatically reject a potential tenant based on a negative credit report.

What Do You Do In the Event of a Negative Credit Report?

If a credit screening comes back with some negative information, that may not be the end of the story. There may be errors or omissions that the prospective tenant can clear up for you.

In addition, there are reasons that someone might get behind on their bills. A divorce, illness, or job loss could have caused the applicant some short-term financial difficulties, but these may have been remedied since the item was noted.

If you decide to refuse to rent to an applicant on whom you have conducted a credit screening, you will need to take the following steps in order to be in compliance with the Fair Credit Reporting Act.

  • You are required to send an Adverse Action notice to the applicant when you deny their application, whether or not the denial was due to the information on the credit report.
  • If they were denied based on credit screening information, the Adverse Action notice should state this, along with the name, address, and phone number of the agency you used for the screening and the fact that the applicant is eligible for a free credit report within the next 60 days.
  • If they were denied for other reasons, the Adverse Action notice should clearly state those reasons.

If the applicant was approved but you are requiring additional assurances -- for instance, a co-signer or an additional deposit -- these are still considered adverse actions. An Adverse Action notice must be sent and the reason must be disclosed in your response.

What Do You Do In the Event of a Negative Credit Report?

Make sure that you undertake a screening process that is identical for all applicants. Do not pick and choose whom to screen, since such inconsistency can open you up to charges of discriminatory behavior and may be in violation of Fair Housing Laws.

In addition, you need to implement a standard of acceptable background and financial information that is fairly applied to all applicants regardless of race, color, national origin, religion, sex, familial status, disability, or any other protected status.

Carefully guard all submitted information both before and after the credit check, especially Social Security numbers and financial records. Upon disposal, the Fair Credit Reporting Act (FCRA) requires you to take adequate precautions to protect against unauthorized access or use of tenant information.

These precautions extend to both paper and electronic records. Thus, if you dispose of a computer at some point in the future, you must ensure that any records stored there cannot be read or reconstructed. In addition, you must only retain information that is absolutely necessary and dispose of the rest.

If you’re looking for a more streamlined and comprehensive tenant screening process, you need the services Rentspree can provide. Whether you’re a landlord, rental agent, or property management representative, you can use our services to create a more effective search and onboarding process. Protect your property and your bottom line when you find the best-qualified and most reliable tenants.