Tenant Screening Strategies: Credit Scores

https://lex4rent.wordpress.com/2017/07/08/tenant-screening-strategies-credit-scores/

BY: CHRIS JOHNSON

TOWNE & COUNTRY PROPERTY MANAGEMENT 

www.lex4rent.com 

This is the first part in my series “Tenant Screening Strategies” 

As a property manager, one of the questions I am asked most often by both tenant and clients alike is: Do I run credit and what factor does it play in making a decision?

The answer to the first part of this question is simple, yes I do. Under no circumstance would I not run a credit report when making such an important decision on behalf of my client.

However, the answer to the second part of that question is not quite as simple. Credit report data and scoring can vary from each of the 3 major credit reporting bureaus. As a property manager, I have seen credit scores vary by as much as 50 points.

Understanding not just the score but the data contained within the credit report is key to making a decision on tenant eligibility. First, a clear and consistent written policy must be put into place regarding the minimum (target) credit score allowed. Some property managers allow for a variance of this score by using a sliding scale and charging on extra deposit based on the point differential from the target credit score. This is a subject for another discussion which I will address at a later date.

First, a clear and consistent written policy must be put into place regarding the minimum (target) credit score allowed. Some property managers allow for a variance of this score by using a sliding scale and charging on extra deposit based on the point differential from the target credit score. (Sliding scale credit score and deposits are the subject for another discussion which I will address at a later date.)

By establishing a clear and consistent credit policy in writing it not only makes it easier to train your leasing agents and staff but applying the written policy equally to everyone also keeps you in compliance with fair housing standards. (Fair housing is yet again another subject that I will address at a later date.)

Many clients ask me what I look for in a credit report. This is where understanding the data contained within comes into play. Most full credit reports will give you a monthly debt synopsis such as current loan amounts and a sum total of all recurring debt payments. This is a very critical and important factor to analyze and compare with an applicant's income. If the applicant appears to make decent money but then you compare what he makes with what he owes and look at the disposable part of the income, sometimes there may not be enough left over to pay the rent. This is also why I use a (DTI) debt to income ratio (DTI ratios will also be discussed more in depth in another article.)

Another thing to look for in a credit report is the number of 30, 60 and 90-day delinquencies and collections. Depending on the report this data can be obscure. However, this information is another critical element of the report that should not be overlooked. Why not? The number of times that a person is late establishes a history of their payment habits. If they are habitually late then will they also pay their rent late? Maybe or maybe not but the 30, 60, and 90-day delinquencies and especially outstanding collections can indicate an established pattern that you definitely would want to consider.

I am also often asked about how I deal with medical collections and student loans that show up as negative in a person's credit report. This is where I do not necessarily and unequivocally disqualify a person but this is also where the all-important debt to income ratio comes into play. If the minimum established credit score is met and enough of their current monthly income is left over compared to their monthly student loans then it is a non-issue. Student debt and medical collections are very unfortunate, however, if the numbers do not add up I still must make a financial decision on behalf of my client and the bottom line is that the numbers must be there.

An owner who owns four units or less and lives in one unit or a private individual owner who does not own more than three single-family houses does not have to adhere to the same fair housing standards and other than outright racial discrimination can make a call on these type of credit vulnerabilities (if they even choose to run a credit report) based on their gut feelings if they so choose.

However, management companies and anyone else involved in the rental business for profit can not afford to appear inconsistent by making exceptions to their credit scoring policies. While personal circumstances may be unfortunate, having a written and clearly established policy regarding credit scores and sticking to it can protect us from a bad decision based on emotions rather than the numbers.