The credit report will provide you with much information about how your tenant handles financial responsibility and the house rules set out in the lease. If you are not using credit reports then we strongly urge you to begin now. This is your first line of defense.
This article will look at the basic information in a credit report and consider each area of information to help you draft a sample a credit policy.
Name and Address:
You should verify that the name and address on the rental application match the credit report.
Confirm previous address on the application against the credit report
Use a valid driver’s license or other picture I. D. to help confirm visual identity. Use the drivers license to confirm the birth date
Social Security: A warning indicates either a bad entry or an identification problem. Ask for some other documentation that confirms the social security number such as tax returns.
Financial Ratios Monthly income input should be verified by recent pay stubs, a letter of intent to hire on company letterhead or tax returns (if self employed)
* Income to Rent Ratio: A mathematical formula that compares gross income to rent. It is useful to determine if the prospective tenant is earning enough to provide a comfortable margin of income for rent.
* Income to Debt Ratio: A mathematical formula that is helpful in determining whether debt load might interfere with ability to pay rent on time. It is useful to know that your future tenant can manage finances. Look at income and look at debt. This ratio can be useful, but keep in mind a mortgage can really create a misleading picture. Look at the trade lines.
Trade lines: The codes that credit reports use may vary from company to company but there will be an indication as to the type of loan. Mortgage loans should be high and will skew this ratio. You should allow for this because home ownership is a plus. Other type’s trade lines are Installment loans and revolving loans.
Late Pays: These indications will help you decide whether your future tenant is able to pay without difficulty because of high debt. It can help validate a bad income to debt ratio. If there is enough money yet late pays are indicated you may consider whether this person has a willingness to pay on time. People manage money differently and you should look at money management skills as well as ability to pay.
FICO Score: This is a mathematical compilation of payment history, debt load and much more. There are more than one hundred variables used to provide lenders with a mathematical profile they will use to determine good risk. Score range from the low 300s to 800+. The higher the score the better the credit profile. * Different Credit agencies will use their own proprietary formulas, such as Beacon.
Public Records: This area contains federal district bankruptcy records and state and county court records of tax liens and monetary judgments. You should look carefully into this area but ask your prospective tenant what the circumstances were. Serious monetary difficulties are a sign of trouble.
Evictions/Unlawful Detainers: Eviction reports do not appear on the standard credit report unless there has been a monetary judgment. Get all the facts you need to avoid a problem. This area indicates serious difficulty with another landlord and is certainly grounds for rejection. Be sure that the name and address is an exact match. Often the scan will pull similar names and it may not be your prospect that has been evicted.
Income to Rent Ratio: Many owner/managers will look at a gross verifiable income of 3x the monthly rent. You may consider combining the gross income of all residents in the unit to come to a household income. You may consider increasing the multiplier when there is more than one income used to make the 3x grade. Be sure to read our Fair Housing articles and to treat all people consistently.
Income to Debt Ratio: You need to establish a number that reflects the tenants ability to pay. Very high debt loads may lead to difficulty with timely rent payments. Establish a red line and apply it evenly to all applicants.
FICO Score: You may want to research the average credit score for your region to use as a baseline for what is acceptable to you. Some average stats as reported by Fair Issacs (developers of the FICO score) as of September 2005 are as follows:
1. Average Number of credit obligations: Eleven
2. 30 day late payments: 40% have never reported late
3. 60 day late payments: 20% have never reported late
4. 90 day late payments: 15% have never reported late
5. Defaults: 10% have never reported a default
Guarantors: When your guidelines are not met, you may require a guarantor or co-signer. It’s advisable to have an application, verifiable income and a good credit report. You may consider stronger financial guidelines since the guarantor would be responsible for both their own rent or mortgage and the applicant.
Public Records: Bankruptcy, liens and money judgments are serious matters. Generally, bankruptcy will not show up after seven years. If you accept applicants with these issues, you should decide on a time frame. Is a bankruptcy or money judgment more than two years old acceptable? You can seek the advice of a real estate attorney.
Evictions: Is there any reason for an eviction? Establish clear rules, write them down as policy for all to see, apply them equally to all and stick to it.
Howard Bell for yourpropertypath. com
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