How to Run a Credit Check on a Potential Tenant
You’ve decided to rent out a room, apartment, or house, and you’ve heard horror stories about deadbeat tenants. In an effort to avoid getting soaked, you decide to run a credit check on your potential tenant. The following tips will help you get started.
Obtain Written Authorization for the Credit Check from the Tenant
First, you need to make sure you comply with any relevant law. The Federal Credit Reporting Act (FCRA) doesn’t specifically state that authorization from a tenant is required to run a credit check, but it doesn’t say that it is acceptable, either. In addition, many states do require written authorization before you run a credit check. The best practice is to go ahead and request authorization from the tenant before you run the credit check. Lease and rental applications with an authorization for a credit check included in the application may often be purchased online, otherwise you can write the authorization yourself and have the tenant sign and date it.
Something like this should suffice:
I/we, authorize landlord to obtain such credit reports and tenant screening reports as he, in his sole discretion, determines to be necessary.
What to Look for in the Credit Report
Once you get the report, what should you look for? First, check the details the tenant included in the rental application against the credit report. Not every inconsistency is significant, you’ll have to use common sense. If there is a major inconsistency between the report and the application, contact the applicant and ask them to explain. If the explanation is unsatisfactory, you will need to decide whether it makes the applicant unattractive as a tenant.
Next, look at the “trade lines” and public records. Once again, you need to use commons sense. A few lates on a credit card or an unpaid medical bill don’t necessarily mean the applicant will not pay his rent. Instead look for patterns. Does the applicant have outstanding debts to past landlords? Eviction judgments? Does it appear that they pay all of their bills late? Do they have significant judgments against them? Judgments can lead to garnishment, which can reduce the applicant’s take-home pay by 25%.
And don’t just look at negative items. If the applicant has a ton of credit card debt and a big car lease, all current, they may be overextended. Use the report to give you a good overall view of the borrower’s financial habits and abilities, and decide based on the big picture.
If You Reject the Tenant After the Credit Check, You Must Send the Tenant a Notice
If you decide not to accept the tenant, and you considered the credit report in making that decision, you’ll need to send the tenant an adverse action notice. In fact, you have to send an adverse action notice even if you accept the tenant, if you:
- Require a co-signer;
- Require a deposit or a deposit that is larger than you would ordinarily require;
- Charge higher rent than you would from another tenant
The adverse action notice must include the following information:
- The name, address and telephone number of the company that supplied the consumer report, including a toll-free telephone number for companies that maintain files nationwide;
- A statement that the company that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it; and
- A notice of the individual's right to dispute the accuracy or completeness of any information the company furnished, and the consumer's right to a free report from the company upon request within 60 days.
It is important to understand that you must send an adverse action notice even if the credit report was not the primary reason for the action you took. Failure to give an adverse action notice is a serious legal violation, which could allow the applicant to sue you. Many companies that provide credit reports to landlords also provide adverse action notices for an extra fee.