Why get a credit report on tenant applicants?

Private credit reporting agencies collect and sell credit files and other information about tenants. Landlords should always check a prospective tenant's credit history with at least one credit reporting agency to see how responsible the person is in managing money. The report will also help to verify that the applicant is actually who they say they are.

Landlords must also be leery of applicants with lots of debts-this clearly includes people whose monthly payments plus the rent obligation will exceed 40% of their after-tax income. The person's bill-paying habits, lawsuits and evictions are also very important information to have before you make a decision to turn over a valuable asset to a stranger.

A credit report contains a great deal of important information on a prospective tenant and usually covers the previous seven to ten years. You can find out, for example, if the applicant has a history of paying bills late, civil judgments against them, has gone through bankruptcy, how much they owe, their monthly financial obligations and often learn if the applicant has been convicted of a crime or ever been evicted. The report may also provide a previous address and current place of employment. (The ability to get information on criminal records and evictions may vary from state to state, however, more states are making public record information available)

If you do not rent to someone because of negative information in a credit report, or you charge someone a higher rent because of such information, you must give the prospective tenant the name and address of the agency that reported the negative information. This is a requirement of the federal Fair Credit Reporting Act. (15 U.S. Code §~ 1681 and following.) You must also tell the person that he has a right to obtain a copy of the file from the agency that reported the negative information, by requesting it within 60 days.

Sometimes, your only choice is to rent to someone with poor or fair credit-or even no credit (for example, a student or recent graduate). If that's your situation, you should still adopt sensible screening requirements that may include:

.   positive references from previous landlords and employers
.   a creditworthy cosigner or guarantor on the lease

Credit Check Fees

It is legal in most states to charge prospective tenants a fee for the cost of the credit report itself and your time and trouble. Any credit check fee should be reasonably related to the cost of the credit check-$10 to $30 is common.

Many landlords don't charge credit check fees. preferring to absorb the cost as they would any other cost of business. For low-end units, charging an extra fee can be a barrier to getting tenants in the first place, and a tenant who pays a fee but is later rejected is likely to be annoyed and more apt to claim that you have rejected them for a discriminatory reason.

If you expect a large number of applicants, you'd be wise not to accept fees from everyone. Instead, read over the applications first and do a credit check only on applicants you are seriously considering. That way, you won't waste your time (and prospective tenants' money) collecting fees from unqualified applicants. It is generally illegal to charge a credit check fee if you do not use it for the stated purpose and pocket it instead. Return any credit check fees you don't use for that purpose.

The Rental Application forms we provide our members informs prospective tenants if you charge a credit check fee. Be sure prospective tenants understand that paying a credit check fee does not guarantee the tenant will get the rental unit.

Verify Income and Employment

Obviously, you want to make sure that all tenants have the income to pay the rent each month. Call the prospective tenant's employer to verify income and length of employment.

Before providing this information, some employers require written authorization from the employee. You will need to mail or fax the employer a copy of the signed release of information form.

It's also reasonable to require documentation of other sources of income, such as Social Security, disability, workers' compensation, welfare, child support or alimony.

How much income is enough? Think twice before renting to someone if the rent will take more than one-third of their income, especially if they have a lot of debts.

Obtain a Credit Report

It's a mistake to collect a credit check fee from lots of people.

If you expect a large number of applicants, you'd be wise not to accept fees from everyone. Instead, read over the applications first and do a credit check only on applicants you're seriously considering. That way, you won't waste your time (and prospective tenants' money) collecting fees from unqualified applicants. 

What You're Looking For in a Credit Report

.  proof of specific steps taken to improve bad credit-for example, enrolling in a debt-counseling group.

 Verify Bank Account Information

If an individual's credit history raises questions about financial stability, you may want to double-check the bank accounts listed on the rental application. If so, you'll probably need an signed authorization form for release of information. Banks differ as to the type of information they will provide over the phone. Generally, without a written authorization, banks will only confirm that an individual has an account there and that it is in good standing. 

Review Court Records 

if your prospective tenant has previously lived in your area-especially if you suspect he or she may be difficult to get along with-you may want to review local court records to see if collection or eviction lawsuits have ever been filed against them. Checking court records may seem like overkill, since some of this information may be available on credit reports, but now and then it's an invaluable tool if you are able to weed out a prospective tenant who is almost sure to be a troublemaker.