How to Run a Credit Check on a Prospective Tenant

Erin Eberlin is a real estate and landlord expert, covering rental management, tenant acquisition, and property investment. She has more than 16 years of experience in real estate.

Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.

Running a credit check on a prospective tenant can help you protect your investment property and the income it is supposed to generate for you. Since you can’t always judge a book by its cover, this check allows you to dig deeper into the financial condition and habits of the prospective tenant. If they have a good credit history and pay their bills on time, chances are higher that they will pay their rent on time as well and keep the place in good order.

What does a credit check tell you?

The information in a credit check will vary based on the agency you use and how in depth of a report you pay for, but can include:

• Identifying Information: Confirmation of name, current and past addresses, date of birth, known employers, name of spouse, and Social Security number.
• Credit History: Lists bank accounts, credit card accounts and any loans (mortgage, student, etc.) It also lists how long the account has been open, the payment pattern over the last two years, the loan amount or credit card limit, and if there are any co-signers.
• Public Records: Will list any evictions reported, bankruptcies, tax liens or (civil) judgments against the prospective tenant.
• Inquiries: Will show the names of those who have requested a credit report on them for the last year.

Some reports will also include the prospective tenant’s FICO score.

What Information Do You Need to Run a Credit Check on a Tenant?

In order to run a credit check on a tenant, the application form should, at a minimum include:

• The Tenant's Full Legal Name.
• Addresses for at least the Last Two Years.
• Social Security Number.
• Date of Birth.
• Current Employer.
• Current Landlord.

To run a credit check on a tenant, you must follow the guidelines set forth by the Fair Credit Reporting Act and must first get a potential tenant’s written permission to do so. The tenant must sign and date a document that states they agree to the credit check.

Many landlords include this clause at the bottom of the Application Form. If your Application Form does not explicitly grant you permission to run a credit check on a tenant, you need to get a separate document signed by the tenant, agreeing to the credit check.

'Applicant gives consent and authorizes the Landlord and all of Landlord’s representation to make any and all inquiries necessary to verify the information provided herein. This information includes, but is not limited to, direct contact with the Applicant’s current and previous landlords, employers, credit holders, credit references, financial institutions, neighbors, police departments…..'*

*It is best to consult legal counsel to determine the appropriate wording.

Landlord Obligations Before Running a Credit Check

To verify that you are an actual landlord who is using their service to run credit checks on tenants, most companies will require you to submit information to confirm this. The required forms will vary by company, but can include:

• A document verifying your current address (telephone bill or similar).
• Proof of identification (driver’s license or passport).
• Proof that you own the rental property (deed, insurance document, mortgage statement, proof of title, utility bills, purchase agreement).

It can take from 2 to 10 days to get approved, but once approved, it will be a much quicker turnaround time to run credit checks on prospective tenants. Checks can sometimes be done in a matter of seconds.

Decide If You Will Charge a Fee to Run a Credit Check

Some landlords find that charging an application fee, such as $15, to run a credit check saves them money in the long run because prospective tenants with poor credit will usually not consent to pay a fee. Other landlords do not charge a fee because they are afraid that a fee will deter even good tenants from applying to rent their property.

Another option is to charge the fee, but if the tenant rents the apartment, you will deduct the fee from the first month’s rent or will add it to their security deposit. A final option is to only perform credit checks on applicants that first leave a deposit for the apartment and have completely filled out your application so that you know they are truly interested in the apartment.

Verify Items Before Running a Credit Check

To save yourself time and money, there are certain things you can verify on your own.

• Prospective Tenant's Name: Ask to see an ID so you can verify that the name and the face are one in the same. Make a copy of the ID to keep with the application.
• Employment History: You can call the tenant's current employer to verify their salary and employment status.
• Prospective Tenant's Current Address and Landlord: Find out if they do live there, and if so, what type of tenant they are.

If the tenant has lied about any of these things, there is really no sense in proceeding with a credit check because they are most likely not someone you will want to rent to.

Run the Credit Check

Experian, E-Renter.com and Mr. Landlord.com are just a few of the agencies that offer tenant screenings for landlords. An online search will provide many other options. Before you give your information to any company, do your homework and make sure they are a trusted company. You are providing them with highly confidential information which, in the wrong hands, could easily be used to steal your identity and create fraud in your name or your prospective tenant’s name, which you could be personally liable for. Of course, running a credit check on somebody comes with a fee, and so sometimes a landlord or realtor will charge all applicants for the credit-check fee regardless of the outcome.

Run the Credit Check

Use the tenant’s Social Security number and other provided information to run a credit check with the agency of your choosing. Some agencies will also want you to fax or email the tenant’s signed form consenting to the credit check.

How Long Will It Take?

Certain agencies can provide you with the credit check in a matter of seconds, while others will take a few days to verify the information.

Analyze the Results of the Credit Check- Good Credit vs. Bad Credit

Now that you have the results of the credit check, you need to review it:

• Chronic Late Payments
• Unpaid Accounts
• Bankruptcies
• Eviction History (If Provided)
• Judgments Against
• Large Amount of Debt- Even if the prospective tenant pays their bills on time, it is important to look at how much debt they have. If a large majority of their income each month is already committed, they may have difficulty paying their rent on time.

If the Credit Check Shows Good Credit

Great! The potential tenant has good credit and seems to pay their bills on time.

That being said, credit reports are not foolproof. Scam artists and professionals tenants know how to falsify information. Make sure you have the same move-in requirements for everyone. Don’t accept any renters without first receiving that all important security deposit.

Review a Negative Credit Report With a Prospective Tenant

If areas of a prospective tenant’s credit report alarm you, ask them about it. There are often mistakes on a credit report that the tenant may not even be aware of.

In addition, good people fall on hard times and the blemish may not be a representation of their attitude toward financial responsibility. A spouse could have run up debt under their name or there could be fraudulent charges on the report that they are not even aware of. It never hurts to confront the tenant and listen to their explanation.

Rejecting Someone With Bad Credit

If the report turns back negative information about the prospective tenant and you decide not to rent to them because of their bad credit, the Fair Credit Reporting Act requires you to take certain steps.

First, you must mail an "Adverse Action" letter explaining that you have declined the tenant's application because of their credit report. You must include the exact reasons for your rejection. You are also required to provide them with the name, address and phone number of the agency you used to run the credit report and inform them of their right to request a free copy of their credit report from the agency within 60 days.

Renting to Someone With Bad Credit

You are legally allowed to require an additional security deposit or that the tenant has a co-signor, as long as you again provide the applicant with the “Adverse Action” letter stating that their bad credit is the reason for these additional requirements.

Tips for Running a Credit Check

• Run a credit check on all prospective tenants, not just the ones who "rub you the wrong way."
• You need a prospective tenant's written consent to run a credit check.
• Landlords must be approved by a credit check or tenant screening company to run credit checks on prospective tenants.
• Screen all applicants in the exact same manner so you are not accused of discrimination.
• If you refuse to rent to someone with bad credit, you must send them an "Adverse Action" letter.
• Always follow the terms of the Fair Credit Reporting Act.
• It is always best to have everything signed and in writing to protect yourself.
• Keep documents and credit reports in a secure place in case a tenant tries to accuse you of discrimination. You can pull out the negative credit report to back up your position.
• Make sure you choose a reputable credit agency to run the report.
• Just because someone has a favorable report does not mean they will be an ideal tenant. Don’t let your guard down!
• Background checks and credit checks are not the same. Background checks offer a more in-depth report on a potential tenant and can be combined with a credit check. You also need specific written consent to perform a background check.