Credit report information provided by private credit reporting agencies is very important when renting a home. Many landlords consider it essential to check a prospective tenant’s credit record before signing any lease. Essentially, credit reports contain your information over the last seven to ten years on how responsible you have been in paying loans on time, whether you have filed for bankruptcy and even if you have been convicted of a crime.
FICO is the most widely used credit score, ranging from 300 to 850, with people with high scores being the least risky. Generally, any score above 650 is considered a medium risk or lower.
Another type of credit score is VantageScore. Credit reporting agencies created this score to compete with FICO score, although VantageScore have the same range (300-850) as FICO scores.
One important thing to note is that these high scores do not directly reflect the characteristics of a good tenant, for example, a high score has nothing to do with the capacity of coexistence with others or the level of care of other people’s property.
For a landlord to access your information, they will require the prospective tenant’s name, address, and social security or ITIN number; all of which are requested on any application and are consented to by the tenant for background checks. It is very important to let prospective tenants know this.
Three companies have cornered the market that you as a landlord should be aware of. These companies are – Equifax, TransUnion, and Experian; each with specialized services based on what you want to know.
The services they offer are usually no more than $40 and can be bought online with immediate results. Another option is to request a credit and screening report from your tenant, many of the credit bureaus provide this option, as well as other landlords oriented websites such as Cozy and TurboTenant.
Charging the tenant for the cost of the credit report is legal in most states, however, the charge must be reasonable with the cost of the report (between 30 and 50 being the norm). California sets a maximum screening fee and requires landlords to provide a receipt.
You have to let the prospective tenants know the amount and purpose of the credit check and you have to be explicit when explaining that this is not a holding deposit fee and does not guarantee the rental unit. So if you are expecting a large number of applicants, do not accept fees from all of them, just do credit checks on those who are genuine contenders. This way you will not be wasting your time and other people’s money. An important fact for you to know is that charging a credit check fee is illegal in case you do not really need it.
In case a tenant is applying for more than one rental, they may very well obtain their report and make enough copies to give to the potential landlords. This is to avoid having to pay for each of the landlords who is considering them as tenants. However, federal law does not require landlords to accept an applicant’s copy; you can require applicants to pay a credit check fee for you to run a new report. Before any decision is made, the advice of an attorney who specializes in this area may be very helpful.
As a landlord, you should be aware that if you are going to charge a higher fee, or reject a prospective tenant because of negative information you received you have to let them know the name and address of the agency that provided that information, as required by the federal Fair Credit Reporting Act. You must also let the person know that they have the right to obtain a copy of the file from the agency that reported the negative information by requesting it within 60 days of being told that your rejection was based on the individual’s credit report.
The law is clear in stating when you can reject a prospective tenant, but establishing credit reports or being more stringent to one who is a racial or ethnic minority or protected class is illegal. Also, federal law known as the “Disposal Rule” requires you to keep only needed information from a tenant’s credit report and to discard the rest.