Analyzing Your Potential Tenant's Credit Report
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When you are a landlord, the last thing you want is a tenant who cannot pay. If your tenant doesn’t pay the rent, you’ll need to go through the legal process of eviction, which is time consuming and expensive. Worse, if your tenant declares bankruptcy, a stay may be put in place preventing you from evicting them while the bankruptcy proceedings are in progress. To protect yourself from monetary loss and a whole lot of legal hassle, it is essential that you take the proper steps to research your potential tenant’s background and assess the possibility that he won’t pay. Tenant credit reports, for landlords, are one of the most important tools you have for doing this.
Evaluating a Tenant’s Credit Report
When it comes time to evaluating your tenant’s credit report, there are two main things you should look at:
- The credit score itself
- The report that shows the tenant’s credit history, as well as inquiries for new credit
Some landlords use credit score alone as a deciding factor. This is a shortcut way to evaluate a tenant and doesn’t involve you doing too much careful research. A credit score is a three-digit number assigned by the credit bureaus using a proprietary and secret formula. The number is arrived at by looking at a tenant’s payment history, average age of credit, debt to income ratio, number of new inquiries, and type of accounts.
Credit scores range from 300 to 850, with very very few people at the extreme high or low end of the scale. If you intend to use this as your metric, you should know that anything above 700 or so is considered to be a good score, while anything above 750 is considered to be excellent. Scores between 620 and 700 are still considered to be acceptable, although the lower you go on that scale, the more risk there is. For those tenants with credit scores below 620, they are considered by most banks and lenders to be a poor credit risk. This doesn’t mean they won’t pay, but it does mean that you need to exercise more caution.
The Credit Report
If you want to do a little more in depth research, you can move beyond just looking at the score and take a look at the report itself. Taking this extra step becomes essential for a landlord who is even considering lending to someone with a poor credit score. When you look at the report consider:
- Payment history: have they ever been late on a payment? If so, how late. 30 days late is a lot less serious than 90 days late. How long ago was the last late payment? Do they have any accounts that have been settled or charged off? If so, that means another lender wasn’t able to get his money back- think carefully about whether you want to be the next person with a problem with this tenant.
- Debt to credit ratio: Are they maxing out their cards and using every bit of credit they have? If so, this is a very sign that they are living above their means, and could be on the fast track to financial trouble. When there’s no more money and no more credit left, the rent may be the first thing that doesn’t get paid.
- Number of inquiries: Are constantly applying for new credit cards? If so, this too could be a good sign that they may start racking up a bunch of debt and getting into financial trouble.
All of these factors should be carefully considered before you decide to rent. If a tenant has something on his or her credit report that sends up red flags, you may want to think twice about renting to that person, or at the very least, require an extra deposit for security to make sure you don’t get stuck for the cash.