How to Analyze Tenant Credit Reports and Background Checks

analyze-credit-report

So far in the Complete Guide to Tenant Screening, we’ve discussed:

The next step is to ask your prospective tenant to authorize a credit and background check. Our secure platform makes this easy- you ask the tenant to give you access to his or her credit report. It’s understandable that tenants want to save money by handing out their own credit report, but as a landlord, it’s important that you don’t use reports given to you by the tenant. It’s a common tenant screening scam and there’s a possibility that the tenant has altered information in the report.

In chapter one, we discussed your tenant screening process. We strongly encourage you not to skip any steps or make exceptions. This is true for requiring the same credit report for each prospective tenant. Doing so will allow you to analyze consistent, high-quality reports.

Luckily, it’s easy to require your own credit report using Rentalutions. We are a trusted partner of TransUnion so our credit and background checks are accurate, comprehensive, and encrypted.

And luckily for tenants, they don’t have to pay separate application fees anymore. Tenants pay $45 for the credit and background check and can share it with as many landlords as they want in our system.

Request a Tenant Credit and Background Check

To get started, you and your prospective tenant will create a free account with us. When tenants fill out our rental application, they are prompted to enter their social security number, which is sent directly to TransUnion, so you never have to see it. This provides tenants peace of mind. And with our secure login and 128-bit encryption, you never have to worry about liability for stolen personal information.

Because the tenant is initiating the reports, you don’t need to be a verified “requestor” of credit reports. In fact, we’ve gone through the long and arduous process of becoming a verified “requester,” so you don’t have to. Not only does this save you time, but using Rentalutions to perform a credit check also helps your tenant. Our credit checks perform a soft inquiry, meaning pulling the report does not impact the tenant’s credit score. Often, tenants will be worried that a credit report will negatively impact their credit score, but you can assure them that it won’t.

Analyze a Tenant Credit Report

Our tenant credit report provides two important pieces of information:

  1. Tenant’s credit score
  2. Detailed financial summary

First, let’s go over how to interpret a tenant’s credit score:

The number we provide on our reports comes directly from TransUnion. The credit score is a single number that summarizes the tenant’s credit history. Some factors that positively influence credit score include:

  • Making payments on time
  • Little to no derogatory marks (bankruptcies, foreclosures, etc.)
  • Total number of accounts
  • Minimal number of hard inquiries

Credit scores range from 300 to 850. While the formula for determining credit scores is kept secret, it is understood that the higher the credit score, the better. A high credit score indicates a tenant is financially responsible.

Keep in mind as you are analyzing a tenant’s credit score that there are some situations that can negatively impact a credit score, even if a tenant is financially responsible. For example, people who lost their jobs during the recession may not have made all of their payments. Even once they found a new job and began making payments on time, their credit score will still reflect the times they did not make payments. These types of exceptions are important for you to consider. We recommend you gather as much information as you can and then make your best judgment call.

The chart below will help you determine next steps based on a tenant’s credit score. Green indicates you should move forward with the tenant (a credit score above 680). Yellow indicates that you need to gather more information (a credit score between 500 and 680). And red means you should decline the prospective tenant (credit score below 500).

Tenant Credit Scores

Frequently, landlords look at the credit score and then don’t analyze the rest of the report. This is a huge mistake, as the majority of the information is found in the financial summary:

  • Current open accounts
  • Financed purchases (cars, student loans, etc)
  • Mortgage items
  • Closed accounts with outstanding balances

We also include a tenant’s account history. This shows all of the tenant’s ongoing payments, including credit cards, loans, and mortgages:

Account History

Payments that were paid on time are shown in green. If a payment is yellow, then the tenant paid late. And if it’s red, then the tenant never paid.

With this information, you can easily track if a tenant is making his or her payments on time. Ideally, you want a tenant who never misses a payment and never pays late.

With this information, you can also determine if the rent price is truly affordable for your tenant. If you add up the tenant’s monthly payments and add your rent price, you will know the tenant’s total monthly expenses. If this number exceeds the tenant’s income, then you know he or she cannot afford your property.

Ideally, all of a tenant’s payments (including rent, loans, credit cards, etc) should all comfortably fall below the tenant’s income.

In summary, the account history helps you determine:

  1. If the tenant will likely pay rent on time each month
  2. If the rent price is affordable

These are both powerful indicators of a tenant’s likelihood of paying rent each month. But remember, even an impressive credit report does not guarantee that you will receive rent on time.

Request a Tenant Background Check

To make things easier for you, our reports at Rentalutions are not separated into a credit report and a background check. Both reports are collected together and are included within the tenant’s rental application so you have every piece of information in one place.

What’s more, our software clearly shows you when your tenant finishes each step of the application process. This clarity makes it easy for you to know where you’re at in your tenant screening process:

Rentalutions' Application Steps

Plus, our all-in-one credit and background check means that you only have to ask your tenant for authorization one time.

Analyze the Tenant Background Report

After reviewing the credit report, the next step is analyzing the background check.

Our tenant background check at Rentalutions includes information from all 50 states. It verifies identity and a tenant’s social security number (SSN).

Our reports pull data from the following sources:

  • Felonies and misdemeanors from state and local jurisdictions
  • Sex offender public registries
  • Federal data including:
  • Drug Enforcement Administration
  • FBI’s Most Wanted
  • Homeland Security
  • U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) Most Wanted
  • U.S. Marshals Service Most Wanted
  • U.S. Secret Service Most Wanted Fugitives
  • U.S. Treasury Office of Foreign Assets Control (OFAC)

This includes data from approximately 700 sources of criminal, sex offender, and eviction records. Combined, these sources have nearly 300 million criminal records, 40 million of which were added in 2015 alone.

Ultimately, the goal of scanning these databases is to provide critical information about your prospective tenant. You’ll learn if your prospective tenant has a criminal history or prior evictions.

If Your Tenant Has a Criminal History

There are 5 factors you should consider before automatically declining a prospective tenant for having a criminal history.

Severity

The severity of the crime will strongly indicate whether or not it’s a red flag. Violent crimes are far more serious than crimes like underage drinking. Use your best judgment when weighing the severity of your tenant’s criminal history.

Recency

If the tenant committed a crime a few months ago, then it is more relevant to you than a crime committed many years ago.

Frequency

If the tenant has committed several crimes, then this is a larger red flag than a solo incident.

Relevance

The type of crime should be heavily considered. Landlords should be concerned about assault, theft, trespassing, vandalism, shoplifting, possession of an unauthorized weapon, etc. Less relevant crimes are underage drinking tickets, traffic tickets, etc.

Legal Considerations

Some criminal sentences carry legal restrictions that the individual has to follow. For example, sex offenders are typically not allowed to come close to schools or parks. If your prospective tenant is a registered sex offender, then it’s important to consider if they are legally allowed on your property, depending on how close your property is to a school or park.

Ultimately, tenant background checks provide relevant insight into your tenant’s behavior and character. If you can determine a tenant will keep your neighborhood and property safe, then you are one step closer to finding your perfect tenant.

Keep in mind that requiring a tenant background check also helps you avoid liability. If a tenant commits a crime, perhaps stealing from a neighbor, then you may be held legally responsible for allowing that tenant to live there. In court, ignorance is not considered an excuse, which is why it’s best to cover your bases and require a tenant background check.

For more, check out 5 reasons landlords must require tenant background checks.

Final Thoughts

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This chapter went through important things to consider as you review and analyze a tenant’s credit report and background check.

When you use Rentalutions to screen your tenants, you can rely on accurate information. Plus, there’s no waiting involved- as soon as a tenant inputs his or her SSN, you will be notified via email that the report is available.

Keep in mind that the information on a credit and background check is extremely personal to the tenant. Everything you learn in a credit report or background check must be kept confidential and should only be used to judge if he or she will be a responsible tenant.

Now that you’ve made it through all of the tenant screening steps, the next step is accepting or declining the prospective tenant.

Continue reading below to learn how to accept or deny prospective tenants.


Originally published at Rentalutions.

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