A step-by-step process on how to minimize risk by properly screening your tenants. The most costly expense is a bad tenant.
Step 1: Check for Show Stoppers
After the application is submitted, confirm there is nothing in their application that prevents you from selecting another qualified applicant during the consideration process. Some examples include:
- Pets: You have requested no pets, and the prospective tenants have a dog. Be careful on what you consider a pet. Service and companion animals are not considered pets, and it is illegal to discriminate on this basis.
- Community Restrictions: You live in a community that requires someone to be over 55 years of age, but none of the prospective tenants are over 55 years of age.
- Move Criteria: The prospective tenants has a move date that is unreasonably far in the future (and you have other prospective tenants in the pipeline who are ready to move sooner).
Step 2: Review Financial Numbers
There are two important financial numbers that you want to review in the application.
Combined income of the applicant group
The applicants will provide you with stated income. You should look at the combined income from all applicants in the group to determine whether they can afford the rental.
How do you determine ability to pay? The applicants' combined income should be at least 2.5 to 3 times the monthly rent. For example, if the combined income is $3,000 per month, then the tenant is qualified for a rental at $1,000 per month.
Your application should also ask for the attachment of pay stubs or W2 forms. If the applicant is self employed, two months of pay subs should be requested. You are looking for steady and stable income. From this information, you should verify that the amount on the attachments matches the stated income on the application.
Combined assets of the applicant group
The amount that the applicants have in their bank accounts will let you know whether they are living paycheck to paycheck. In fact, a recent survey found that 49 percent of Americans live paycheck to paycheck. If the tenants have enough liquidity in their bank account for emergency funds and/or to cover their rent if they were to lose their job, then that is a good sign for you.
Also, in the instance where your applicant does not have a steady job, then the assets should cover more than a year of living expenses.
These numbers stated in the application will need to be verified through the attached documents and/or Step 6.
Tenant screening is the most important steps in the process. A tenant's historical credit worthiness and records will verify their qualifications as a tenant.
To the best of your ability, avoid performing credit and background checks on multiple applicants at the same time. You do not want qualified applicants to pay a fee if you may select another tenant. They may ask for a refund, and screening fees are non-refundable by the Credit Bureaus.
Step 3: Perform a Credit Check
Tenants apply to multiple properties and thus are sensitive about the number of fees and credit inquiries.
To begin, have a good system
Never let a tenant provide you with an emailed or paper version of their report. How can you be certain that they did not tamper with the numbers or information. However, your credit check process should provide the following reassurances to all applicants:
- Transparency: A report that is also shared with the tenant for their own use
- No impact to credit score: A check that is considered a soft pull on their credit and will not affect their score
- Security: A system that is encrypted, which means their personally identifiable information (such a social security number) is not shared with anyone
Due to the amount of identity theft out there, it is not advisable to have the applicant's social security number floating around on a paper application.
Consideration for good credit
Once you have requested the tenant's credit report and score, you should understand the details in the report. Fortunately, Hemlane provides you with a very legible, easy-to-read report.
From a score perspective, each of the three Credit Bureaus have slightly different reporting systems, but the credit score should not be drastically different. A score above 650 would be considered a "qualified" score in most situations. However, if you have a highly demanded upscale rental, then you may want to request a higher minimum score.
If the score is below the required minimum (typically 650), then you want to understand the details. Here are a couple of situations where the score may be low:
- Little or no credit: If a tenant has low or no credit, then you may not want to immediately deny them. The tenant may be responsibly paying their bills with cash or on debit. Or, they may just be starting out, such as a recent college graduate. A tenant who is financially responsible and paying cash with zero credit is better than a tenant who irresponsibly purchasing on credit and cannot pay their bills.
- Medical bills and student debt: Some tenants get into debt very quickly due to unforeseen medical expenses and/or education. While these situations are not ideal, it is not as bad as the next situation (below).
- Irresponsibly with bills: In most cases, you will see tenants have low credit due to being financial irresponsible. They have a car loan past due and five credit cards out for collection. When you see credit low due to these types of accounts, you should be extra cautious.
Next steps with unqualified credit
If a tenant does not meet the credit or income requirements, then you can request a co-signer. This person should complete both the application and screening. For the application, the most important sections are the employment and assets sections. On the screening, the credit must be over the minimum.
This co-signer also needs to be listed on the lease. They are the guarantor, whom you can take to court, should you take the tenants to court for financial damages.
If the tenant cannot provide a co-signer, then you can consider requiring more for the security deposit.
Side note: Hemlane credit reports also include verification on employment. You should cross check this information against the stated employment in the application.
Step 4: Check the Eviction Report
This section is very simple. If an applicant has an eviction on record, then it means not only did the tenant go to court over the eviction, but the court did not rule in their favor.
There are some eviction scenarios that (unfortunately) go unreported.
Step 5: Understand the Criminal Report
You should pull a report to determine if there is anything to significantly question in the report. However, this report is a sensitive topic. For good reasons, the US Department of Housing and Urban Development (HUD) states that owners cannot put a blanket ban on applicants with an arrest or criminal record. Owners and managers also cannot refuse to rent because of a prior arrest without conviction. If an applicant’s background check has a conviction, then the owner must prove the exclusion is justified. More details can be found here.
The following steps will provide the most comprehensive screening process. However, it may be difficult to verify this information and therefore many managers do not perform these steps.
Step 6: Verify Rental History
Verify the past 2 places of residence. The current place of residence will most likely not be able to answer questions regarding the deposit withholdings or move-out condition. And unfortunately, some residences provide a positive review for a poor tenant, just to get them out of their own property.
Verify the property owner in public records
If you can, verify names and identities. You can find owner records through: Public Records by county, HomeInfoMax, Property Shark. And most property managers will have public websites.
Contact the property owner or manager
Be prepared to provide the property owner or manager with your "authorization form," as they may request it. This form contains the tenant's signature, allowing you to perform verification on their application. Fortunately if you are using Hemlane, we provide this form for you.
When you contact the property owner or manager, ask the following questions:
- Can you please confirm the dates of residence and the rental amount?
Helps confirm this is not a friend.
- Did you have to take any steps towards eviction?
If yes, then this is a pretty severe.
- Were there any partial or late payments?
Confirms timely payments. More than one late payment is a red flag.
- Were there any lease violations or neighbor complaints?
- Did the tenant leave the property in the same condition as when he/she started the lease (excl. normal wear and tear)?
- Can you confirm the tenant did not try to sue you?
Confirms tenants amiability. Tenants sometimes feel entitled to get a full deposit back and may threaten to take you to court over it.
Step 6: Verify Employment and Income
Larger corporations may have a more expensive, formalized verification process and smaller companies may have no process at all.
Check to see if the tenant is on LinkedIn or another social channel with their employer listed. You can also validate that they have connections within their organization. (But don’t contact these connections unless you have permission … that’s just creepy.)
Quick side story: One property manager tried to convince us that a resume was better than a LinkedIn profile, but their logic is flawed. We would rather take what is written for the public to see over someone’s embellished personal copy of their resume. A LinkedIn profile is shared with your boss and a paper resume is not.
Contact the employer and/or manager
Ask for dates of employment (to confirm it’s truly their manager), type of employment, and current income. Please note that the same authorization form, used for the residence history check, is required for the employment verification. Fortunately if you are using Hemlane, we provide this form for you.
In summary, the most costly expense is a bad tenant. You want to have a level of assurance that a tenant will not violate your lease covenants and payment terms. The above steps provide the most professional process to screen tenants.
It is better to have your property vacant than to select an unqualified applicant.
It may appear to be a lot of work, but Hemlane will do this work for you. The system will request the required information, follow up with applicants as appropriate, and provide an informed decision on applicants.