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jean pocket wtih 4 credit cards - Running a Tenant Credit Check – why and how?

Running a Tenant Credit Check – why and how?

A tenant credit check is a wealth of information and is the final step in the tenant screening process. It shows you a snapshot of the tenant’s financial history, spending habits, and most importantly, their payment habits. Based on the credit history, you can make an informed decision about the tenant’s creditworthiness and financial condition.

But…credit checks are so much more than that. Tenant credit checks vary in the amount of information they provide. Some provide a very comprehensive overview of financial history, bankruptcies, loans, and evictions. Others only offer a credit score, recent addresses and employers, and recent loans.

A tenant credit check can also confirm;

  • identity, current and previous addresses, and known employers
  • credit history including credit card accounts, utility payments, phone bills, loans, payment patterns, credit card and loan limits, and co-signers
  • bankruptcies, liens or civil judgments, and evictions
  • FICO Score

It’s important to note; you must have the tenant’s permission in writing, signed, and dated before running a tenant credit report. Either include this information in the application form or include it as a separate form. You must also follow the same standard screening process for all tenants. If you run a credit check for one tenant, you must run it for all tenants.

Who can run a tenant credit report?

Your local residential tenant association or Landlord Facebook Group, or even a quick Google search, will have listings of credit bureaus available for members, often at reduced rates. It’s a good rule of thumb to run the credit report first, and if the credit score meets your standards, proceed with the references. However, if the credit score doesn’t meet your criteria, save yourself the time and effort of screening references.

 Credit companies permit landlords to run credit checks with:

  • A document verifying you own the rental property, such as a current land title or mortgage statement from your financial institution
  • Documents verifying your identity. Government-issued identification (drivers license or passport, health care card), a utility bill with your identity and current address

The turnaround process can be super quick ( 30 minutes) to a couple of days, depending on the company. Once you’re approved, you can run a credit report online in several minutes.

Should you charge for a credit check?

The answer to this question depends on your preferences and how tenants in your market will react. If it is commonplace to charge for credit reports in your area, feel free to charge. Some landlords charge a credit report fee, and once the tenant is approved, deduct it from the rent or issue a refund. Either way, it’s your choice.

Verify identity with supporting documentation

Always ask the tenant to provide documentation. Government-issued identification (driver’s license, passport) confirms the potential tenant’s birth date,  identity, and current address. If they refuse, move on. Good tenants understand there is a process and are happy to follow it. Never apologize for asking for information that helps you decide who to allow into your property.

How to interpret the tenant credit report

Most credit screening services recommend only accepting tenants with a minimum FICO score of 600 or a “C” rating.  If tenants pay their bills on time every month, they should have a C rating.  “R1” means they pay on or before the deadline. R2 and R3 indicates they pay consistently late by a few days to a week. Any rating higher than R3 means trouble,  usually a history of nonpayment, liens, or collections.  Be sure to check their debt load. If rent is $2000/month plus utilities, they take home $2500/month net but have a debt load of $3500; how will they afford the rent? Ask them to discuss this with you. I’ve known tenants who were trust babies, had inheritances, substantial savings, or who had a parent, sibling, or loved one who subsidized their rent.

The Canadian government provides a summary of how to interpret a credit score.

In addition to late payments, warning signs also include unpaid accounts, eviction history, judgments against or bankruptcies.  You can take bankruptcies on an individual basis. Many people with solid credit histories have fallen off the rails because of a death of a loved one, divorce, losing a job, or illness. If the potential tenant comes clean and discloses this information before the application process, it’s a good sign. If they try to hide it, it will show up in their credit report.  They should be willing to provide proof the bankruptcy is discharged and show proof of how they have gotten themselves back on track.

Disposing of tenant credit reports

Cybersecurity is a real threat; FOIP  and PIPEDA legislation outline guidelines for destroying these sensitive documents. Be sure to follow them.

Rejecting an applicant based on their tenant credit report

Once you’ve run the credit report and checked the tenant’s references, you must decide. If you choose to reject a tenant based on their poor credit score, what should you say? In Canada, you are not required to provide a reason for rejecting a tenant, and the less you say, the better. Although tenants deserve a response, all you need to say is, “I will not be proceeding with your application.”   Document your response, or better yet, email or text it and save it in your files as proof you have responded.

Considering the few minutes it takes to run credit checks, doesn’t it make sense to let  the tenant credit check act as your private investigator? A tenant credit check supplies you with your potential tenant’s financial history, spending habits, and payment habits. It saves you from late payments, damage, evictions, and ongoing headaches.

Wouldn’t you agree running a 2-minute tenant credit check pays a ROI in spades?

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Nelda Schulte is a property investor who is passionate about helping investors who self-manage have profitable investment properties through resources and education. If you struggle with the wrong landlord forms, or worse yet, no landlord forms check out Nelda’s 10 Essential Editable Landlord Forms that help you separate the good tenants from the bad and increase your property’s profitability.

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