Tenant screening can be time-consuming and costly. Every landlord knows the importance of selecting high-quality tenants, but the process of screening each one can be tedious.
Property management software can tackle some of the challenges of tenant screening much more efficiently than you can alone. Whether you use software or not, you should know the basic steps of the screening process. Here are six vital components of tenant screening.
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1. Credit Reports
Credit reports are essential to finding tenants who can be trusted to pay their rent. When you run a credit report, you should look for all five elements:
- Basic information
- Fraud indicators
- Tradeline summary
- Inquiries
- Credit/resident score
The credit score itself is a useful data point, but you are best served by factoring in all five components into your evaluation of an applicant’s creditworthiness.
The tradeline summary, for instance, provides key insight into an applicant’s current debts and active accounts. Without that information, you aren’t getting the full picture of a renter.
2. Background Checks
Background checks are also a must for all applicants. The term “background check” typically refers to criminal and eviction histories.
Criminal reports can be obtained from three places: county, state, and federal agencies. While county records are the most accurate, they may be costly and slow to obtain. State records are faster, but potentially inconsistent. Federal records have the benefit of range in addition to bundling with national sex offender and terrorist watch lists.
Eviction histories must be obtained via a separate eviction report service. Eviction reports are typically only filed by first and last name, so be particularly careful that you’re viewing the right person’s information. A previous eviction is a serious red flag, so be sure you know about any that exist.
3. Income Verification
Income is another good predictor of a tenant’s ability to pay rent. Before you approve any tenants, request that they self-report their income as well as provide a pay stub or other proof of income.
When deciding whether applicants meet your income requirements, consider both sufficiency and reliability. The most qualified tenants have both enough income to meet your threshold as well as reliable access to it.
In general, rent plus monthly debt should not exceed 70% of a renter’s income. This rule aims to ensure that renters can manage their other financial responsibilities given their current income. It’s up to you how closely to follow the rule, but it can help guide and justify your final decisions.
4. Tenant Application
Your tenant application is an important way to gather the information that you won’t find in the rest of the screening process.
For starters, you should always ask for basic contact information, current and prior residences, several years of employment history, and proof of income.
Also, be sure to ask about any preferences regarding your properties. For example, find out whether renters smoke or own pets, as these are two situations in which you as the landlord retain the right to deny an application.
Finally, be aware of what not to ask. According to the Federal Fair Housing Act, it is illegal to discriminate against housing applicants based on race, color, religion, sex, national origin, familial status, or disability. Have a legal expert review your application to eliminate inequality and legal liability.
5. Scoring System
The most important principle for the entirety of your screening process is equality. Screen your tenants the same way every time or risk tenant complaints and legal trouble.
One way to hold yourself accountable is to use a tenant scoring system. A scoring system assigns potential renters a numerical score calculated with weighted variables you predetermine based on your personal values.
Using a tenant scoring system allows you to weigh different candidates objectively. It also serves as formal documentation of approvals and denials. If a tenant asks why you denied their application, a scoring system is your best defense against discrimination claims.
Find Qualified Tenants for Your Rental Properties
Tenant screening doesn’t have to be a daunting process. With these six components in mind—and the help of property management software—tenant screening can be time and cost-effective. By dedicating a little time to each area, you are sure to secure great tenants for your properties.