If you are new to the world of rental property ownership, you might ask yourself, "How do I perform a tenant background check?" The first step in being a profitable landowner is getting a program in place to screen potential residents.
Resident screening is essential because it can minimize some of the risks associated with being a landlord, such as late payments and non-payments, eviction of residents, and harm to properties.
Over the last 35+ years of managing rental properties, we have leased nearly 10,000 homes and processed close to 500,000 applications. During this time, we created ten criteria that allow us to select a well-qualified applicant to rent a home under our management.
An article about screening residents would be incomplete if we didn't talk about Fair Housing. All landlords and property management companies are held accountable by Fair Housing. Fair Housing is an excellent resource for both landlords and residents.
Fair Housing clearly states what you can and can't ask an applicant. We will get into that as we go along in the article.
Here are the 10 criteria to look for when screening for residents:
1. Pre - Screening
2. Background Check
3. Rental History Current
4. Rental History Previous (Crucial to know how they left the property after they moved out)
5. Employment Verification
7. Credit Check
8. Debt to Income (More important than their FICA score)
9. Court Records
10. Pet Screening
Pre - Screening
First, you need to write out the requirements that you will use in selecting a resident. For example, no evictions in the last 7 years or have any non-supportive pets need to be included in the application. That way, prospective residents can immediately disqualify themselves before paying an application fee and undergoing the entire screening process.
The purpose of the background check is to look for any evictions or foreclosures. Knowing this information will provide you insight into the applicant's payment history regarding rental payments. Until recently, landlords and management companies did not report rental payments to credit bureaus. An eviction will not show up on a standard credit report but will show up on a background check.
Current and Previous Landlord Verification
Reaching out to current and previous landlords will help you determine if the resident is a responsible renter. Prior landlords will let you know of any red flags a potential resident may pose. For example, if the resident was late or missed rent payments, the resident refused to move out, the resident was disruptive and defaced the property upon moving out, and even if the landlord had to file court papers against the resident. All of this is useful information to know when resident screening.
It would help if you always considered the possibility that your resident could run into financial trouble in the future and will no longer be able to afford rent. To circumvent this issue, here are some preemptive measures you can take during the resident screening process. The first step is verifying the resident's income and employment. I would recommend having an online rental application where the resident can upload all necessary documents for you to review. These documents can be a copy of their bank statement, w-2 form, pay stub, or an award letter. On the rental application, we also ask for employer history along with contact information. You should contact your resident's employer and prior employers. Once you have a resident's employer on the phone (or via email), be sure to confirm:
- Their job position and dates of employment
- Their salary
The second step is to follow the standard rule of thumb, seeing if the resident's income is 3x the rent price. It is optional to follow this rule; however, it is a great guideline to use when deciding.
Another way to estimate the likelihood that a resident will pay rent is to require a credit report check. In the credit report, you can see the number of outstanding payments a resident has, how many open accounts the resident has, and the amount of outstanding debt. Observing the delinquencies and pay patterns will give you a general idea of how financially responsible the resident is.
Debt to Income
While you evaluate the resident's credit report, you should look for the monthly payments they are making each month, which will let you know if they can reasonably afford rent. If you add up the resident's monthly payments plus your rent price and compare that to the tenant's income, you can determine the debt to income ratio. One ratio you can follow is 55% to 65%. If an applicant has more bills than income no matter how much one has in savings eventually, they will go to eviction.
Check Court records
Court records will let you know if the prospective resident has had any evictions, foreclosures, judgments, etc. Applicants with evictions or judgments may not be ideal residents, it shows they have a history of not being a responsible resident.
If you are an owner that is okay with pets in your home, you should implement a pet screening process as well. You can also use an online database for pet screening, allowing the applicant to upload vaccine records and photos of the pets. Pet screening is essential because you may not want certain dangerous breeds in the home in case your insurance company will not insure you with pets in the home that are 60lbs+.
The bottom line
When learning how to screen residents, you should always take precautions such as conducting a background check, a credit check, verify income and employment, examining previous and current landlord resident history. All this information will help you decide how likely that prospective resident would be responsible for your home.
Most importantly everyone (Individual Landlords and Property Management Companies) is required by Federal and State Laws to process every applicant the exact same way on every item every single time. Your process needs to be written down so in the event a Federal or State Agency contacts you, they will want to see this and make sure you followed it with every applicant.