The tenant approval process is both art and science. The science consists of gathering basic information and complying with legal requirements. The art is deciding how much more information to obtain and making decisions based on the information you gather. Here’s a summary of the process we go through.
The Application. In renting our last property several months ago, I received a call in response to our ad. The caller wasn’t a tenant. He was a landlord. He was calling because he saw our online ad and wanted some information on responses that we had had. As we talked, he told me that he had moved the previous year and decided to rent his old home, rather than sell it. He said he was having some problems with his current tenant paying the rent. I asked how much the tenant was behind. He said 2 months. I asked if his tenant had payment problems or evictions at previous addresses. He said he didn’t know; he didn’t take an application.
An application should include the following:
- All the basic biographical information–name, address, date of birth, and social security number.
- Rental history. We request an applicant’s current address and landlord and the applicant’s prior address. Some landlords and property managers ask for one or two more.
- Employment information. This includes current employer, address, wage information, length of employment and contact information for verification.
- References. We obtain contact information for a personal reference and a family member. I never call them. This part’s a collections thing. In the worse case scenario, if I end up with a collections case (none yet), these are just a couple of additional ways to locate the tenant.
- Vehicle information/license. See “References” above.
Signed consent. This is the “legal compliance” part. An application must include a clearly worded consent, signed by the applicant, to obtain a credit report and conduct a background check. It should also include the applicant’s consent for all employers and prior landlord’s listed in the application to provide information about the applicant. This last part isn’t a legal requirement for the landlord, but you probably won’t be getting much information from the applicant’s employer or prior landlord without it.
Application Fee. We charge a fee to cover out-of-pocket costs–essentially the cost of the credit and background check. Some charge a few extra bucks for their time in processing an application. I’d rather have more applicants than fewer paying an extra $5 or $10. Conversely, you can charge $0 and get a bunch more applicants, but mostly ones you won’t want.
Background Check. Our background checks consist of a combined credit report and state-wide criminal background check. We’ve listed several online credit services here, many of which provide both. They’re not very expensive and should be covered by the application fee. They’re available with little time or effort. Some landlords obtain a credit report only. Others, like my calling friend, forego both. Either way, it’s a pretty big gamble, and one we’re not willing to take.
The credit report and background check may reveal some show stoppers, so after the application, that’s where we start.
The Show Stoppers
So, we have our completed and signed application in hand. We’ll typically run a credit report and criminal background check the same day. There are two items that can end the process here–a prior eviction or a criminal conviction. And in answer to your question, yes, we’ve seen both.
Income and Credit Evaluation
I’ve often heard landlords recommend approving only “good credit” tenants. Then there’s reality. People have credit problems. Right now, many people.
Some tenants are tenants because of preference or circumstance. We’ve rented to military families that have been stationed in our area for a set period. We’ve had other tenants that were looking to stay in a particular school district until their oldest child graduated. In both cases, the tenants had good credit.
Many tenants, however, are tenants because they can’t buy due to credit problems. This is the “art” of the tenant approval process–the judgment call and the risk assessment. Here, we don’t use credit score criteria, although we do consider whether a pattern of credit problems or debt build-up will lead to an inability to pay.
But, for the most part, we will still consider approving a tenant with problem credit provided they have a good rental history. Whether the credit issues speak to the tenant’s circumstances or financial irresponsibility, there is still a vast expanse between late Visa payments and losing your home to eviction.
We also consider the worse case scenario–damage to the property and rent loss due to eviction. A good rental history mitigates the likelihood of these risks. Also, in our area, the eviction process is relatively quick. And if a tenant fails to meet their obligations, we will act on it quickly.
Employment Verification and Income
We always verify the tenant’s employment. Employers regularly provide this type of information for their employees. Larger employers sometimes engage an outside service with a toll free automated system. With those services, the applicant obtains a password and provides it to the landlord. In all other cases, making sure you have a contact name cuts down on the time spent in the department transfer/hold cycle.
For income criteria, we’re looking for gross income of around three times rent. We’ll consider a higher rent to income ratio in cases of good credit.
The Personal Assessment
I personally show the properties and have a chance to meet with the tenant personally. I’m not regularly denying applicants on a “gut feeling,” but that meeting may tip the scales in an already marginal case.
One final note (more legal compliance stuff)–any “adverse action” with respect to a tenant application must be followed by an Adverse Action Notice under the Fair Credit Reporting Act. An adverse action includes denial of the application, but also includes setting additional conditions for approval, such as requiring a co-signer. You can find more information from the Federal Trade Commission concerning the FCRA’s requirements and compliance here.
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{ 8 comments… read them below or add one }
Very interesting post, thanks for writing this up!
Sounds like a good system. What service do you use to run your credit and background checks?
FYI, Connie at http://conniebrz.com/ has a good Background Check Manual that can be downloaded from her site. She used to be in the background check business.
Thanks for link to the resource that Connie has put together. I enjoy your and Connie’s sites!
Mike,
Do you have a service that you use to run credit and background checks? I ask because its always nice to know how others do things.
Terry,
Ooops. I just kinda skipped the answer to your question in my first response. We currently use FABCO. For credit reports, most of the services typically draw on one of the majors, such as Experian. As for criminal records, I do not know how FABCO or others compile the information, but we’ve certainly picked up convictions for the occasional applicant. In the rare case, I’ve run some of my own searches on court dockets, which are also available online for many area. Oh, and the primary reason for FABCO vs. others is pretty simple–price.
Good Article. Maybe you can add details about corporate tenants. In India corporate tenancy is more prevalent. Corporate tenancy has lower risk associated.
what do you do in the case where you have a very good applicant on paper, good income and history… but he wants to change all the terms of the lease to his “protection”??? He is a doctor and has the money to do it but won’t take it to an atty saying it would be a waste of his money????
What about rental policies. Do you provide any information to prospective tenants about what your policies are along with the application? If so what does it look like? The idea behind this would be that anyone who didn’t care for them would look elsewhere and not waste your time.
How long do you keep rental application information on file? Especially on denied applications.
What about income to rent ratio- what’s your limit that says you can’t afford this find a cheaper place? I recently rented to a single mom, a fourth grade teacher. The rent was almost half what she made. She ended up getting evicted after five months. I think the usual rule of thumb is rent should be no more than one quarter the income- but that’s not always realistic.