44.1 million American households are renters. There are many advantages of renting, such as having no maintenance costs and access to amenities, and people across the nation are cashing in on them.
If you are considering investing in real estate to become a landlord, you’re in quite the lucrative field. There are many more renters than there are available properties, meaning you most likely won’t have a difficult time finding tenants to rent to.
Yet, it’s not as easy as receiving an application and signing a lease. There are essential steps you need to take to ensure you are renting to responsible tenants who will pay their rent on time and won’t damage your property.
One of the most important of these steps is running a rental credit check. Be as prepared as you can be and learn all about the rental credit check process by reading our guide below.
Credit Check vs. Background Check
First, you should know the difference between a credit check and a background check, as they are often thought of as one thing. Yet, a background check does not include a credit check.
Instead, a background check looks into the criminal history and eviction history of the applicant. A credit check will show the applicant’s credit history and current credit score.
If you want to get to know more about the tenant than just their credit history, you may also choose to do a background check as part of the application process. You can also require proof of income and references from previous landlords as part of the tenant screening process.
What to Look For in a Rental Credit Check
There are many things you can find out from doing a rental credit check, so you should know what the most important factors are to look for.
First, you’ll be able to obtain the applicant’s current credit score. The credit scale ranges from 300 to 850. A higher credit score generally means a more financially responsible person, but low credit does not always mean the person is irresponsible.
Especially in today’s current economic climate, it’s easy for people to fall behind on bills. Because of this, you can look beyond their credit score to get a better look at their financial situation.
Browse through their credit history to see how long they have held their credit accounts. If they have no credit, this may be a red flag that they are not financially active or stable enough.
Look into their hard inquiries to see how often they apply for credit. More than a few every six months is a negative sign.
Perhaps the most important factor to find is their payment history. If they have a responsible payment history, you can have a better idea that they won’t end up defaulting on their rent payments.
The last factor you need to consider is their credit limits and utilization. This will tell you the amount of credit your applicant is currently using, which can help determine if they are overspending on a regular basis and are financially irresponsible.
Information to Obtain From Tenant
All of the information you’ll need to run a free credit report should be provided on the application filled out by your tenant. You should ask for your tenant’s full name, Social Security number or Individual Tax Identification Number, and current address.
The application you create should also have a place for your applicants to consent to a credit check report. Make sure to tell them whether it is a soft or hard pull and if there are any credit check fees—more on that below.
How and Where to Get a Rental Credit Check
There are a few different ways you can run a rental credit check.
There are three major credit reporting agencies: Equifax, TransUnion, and Experian. All of these provide credit screenings that include credit checks, usually for a fee of around $40. Generally, you can order the reports online and get them within minutes.
To do this method, you would need to gather the information for your tenant as listed above.
Another method to get a rental check requires working with a third-party service. This service will reach out to the tenant directly, charging them a fee to sign up for an account online with their service.
They will then provide instructions for the tenant to order their credit report and then send it to you. This method avoids you having to pay any credit check fees or needing to obtain sensitive information like their Social Security number.
Hard Pull vs. Soft Pull
A credit check with a credit bureau can be either soft or hard, but it’s crucial to understand the difference and make your tenant aware of which one you will be conducting.
A soft credit check will not affect your applicant’s credit, but a hard credit check will. While you will receive more information with a hard pull, most landlords choose to opt for a soft pull, as you still get the relevant information that you need.
If you choose to do a hard pull, ask your tenants before doing so, as they may not be able to afford another hard inquiry on their credit report.
Collecting Fees for Credit Checks
It is legal in most states to charge a credit check fee for the cost of the credit report itself. If you do decide to charge a fee, make sure it is reasonable, generally ranging between $30 and $50.
Explain to your applicants what the credit check fees are for, and ensure they know it is not a deposit nor will it guarantee them the unit.
If you receive many applications, it is best only to run credit checks and charge credit check fees on the applicants that you are most likely to rent to. Screen their applications first, checking that they meet your rent-to-income guidelines.
This will help you not waste your time or your applicant’s money when running your rental credit checks. Also, be aware that collecting credit check fees and not using the money for that purpose is illegal.
Always return any credit check fees that you don’t end up using or needing.
Can Tenants Provide Their Own Credit Report?
A tenant may ask you if they can provide their own report, especially if they are applying to multiple properties and need to undergo numerous credit checks.
While this is possible, it’s best to conduct your own credit checks to ensure you are getting the most up-to-date and accurate information. There are also laws in certain states that require you to conduct your own credit check, so make sure you look into that before accepting any credit checks directly from your applications.
Dealing With Applicants That Have Bad Credit
Bad credit should not always mean disqualifying your applicants. Besides their credit, there are many other factors to consider, such as their ability to get along with their neighbors or their desire to take care of your property.
If you run into a tenant you would like to rent to that has bad credit, you also have options that can still provide you with some security.
You may choose to require a higher security deposit for a down payment. You have the option to require a cosigner or to ask for the first and last month’s rent upfront.
Whatever you feel comfortable with, consider going that route before rejecting them solely based on their poor credit.
If you decide to reject an applicant because of what was in their credit check, or you choose to charge them a higher rent, you will be required to provide them with the name and address of the credit reporting agency that submitted the negative information.
To learn more about rent credit reporting and how it can benefit you, check out this article.
Conducting a Rental Credit Check Can Benefit You
Running a rental credit check is easier than it may seem. When you’re a landlord, you want to be able to trust that your tenants will pay their rent on time and keep your property in good shape.
While there is no real way for you to know this will happen, a credit check can show you how financially responsible your tenant is. Make sure to get to know them a bit first, too, and see what else they have to offer besides their credit score.
If you’d like to learn something else today, browse through our collection of informative articles.