Tenant Background Checks: A Comprehensive Guide

Finding a potential partner by right-swiping on a dating app is easy. But looking for a reliable tenant for your rental unit? That takes a bit more effort. Introducing the art of conducting tenant background checks that reveal the hidden picture behind well-curated application forms to help you identify perfect renters for your properties.

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In this article, we’ll delve into the components of a background screening process, explore the legal landscape and equip you with the tools and strategies needed to confidently choose the best tenant for your units and streamline property management. Are you ready to transform your screening processes from uncertainty to certainty? Let’s get started.

Article Roadmap

• What Is a Tenant Background Check?
• Components of a Background Check
• How To Run a Background Check
• Popular Tenant Screeners
• Best Practices
• Next Steps

What Is a Tenant Background Check?

A tenant background check is the process of verifying a prospect’s income, background and credit history to determine their suitability for your rental units. It’s a crucial step in the larger tenant screening procedure that ensures you make a calculated decision while choosing renters. A thorough background check helps you:

• Verify the legitimacy of rental applications.
• Choose responsible and trustworthy tenants for your property.
• Promote fair screening processes and adhere to fair housing laws.
• Ensure consistent rental income by choosing financially stable renters.
• Reduce turnover rates by selecting the right tenants for the right units.

Most of the data included in background checks comes from three major credit reporting bureaus — Equifax, TransUnion and Experian. You can either contact these agencies on your own or use tenant screening services to get reports with just a few clicks at a cost. However, we recommend using reports from all three agencies to get a holistic view of a person.

Before diving deeper, let’s understand what to look for while screening a prospective tenant.

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Components of a Background Check

Before entrusting your property to a new tenant, it’s essential to conduct a comprehensive tenant background check, which involves several key components to ensure a secure and successful rental experience.

Personal Information

The first and foremost step is collecting a prospect’s unique identifiers to access their public records. You can request the following information in your rental applications and verify it using credit reports:

• Date of birth
• Full name
• Phone number
• Email address
• Social security number

You should also look out for AKAs, or “also known as,” which are alternate names or aliases a person can legally adopt for external reasons. Verifying them ensures you don’t miss any hidden information about a person logged under a different name.

Employment and Income

Verifying a person’s employment and income before signing a lease helps you choose tenants who can afford to rent your unit. It lowers the chances of defaulting on rent in the future and ensures a steady income source.

Consider including a minimum income requirement in your application forms to attract suitable applicants and inform them about your preferred rent-to-income ratio. It’s a good sign when the rent amount is not more than 30% of a tenant’s income.

However, it’s not a rule set in stone, and the ratio may differ depending on location, population and economic conditions. Recent reports found that New York metro areas have the worst housing affordability conditions, with its rent-to-income ratio reaching almost 69% for an average renter.

Address History

Background reports contain a history of an applicant’s previous addresses, but you should note that these are from external sources. It’s important to compare the address history with the information provided in rental applications and verify it by contacting past or current landlords.

A good rental history represents a stable renter, but its absence can be an additional risk to your business. In cases of young or student renters, you might find no previous rental history and can consider co-signer requirements to safeguard your interests.

Tradelines and Collections

Tradelines represent the different types of accounts owned by an applicant. It shows a snapshot of every active account, mortgage, utility bill, student and home loan, credit card, automobile loan, medical debt, and other line of credit.

However, collections happen when an applicant defaults on a payment, and the concerned agency sends the case to a collection unit to retrieve the balance. Most companies don’t file a lawsuit for one-time late payments. Therefore, finding a collection record in a report signifies a pattern of late or non-payments, which can be considered a red flag.

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Credit Inquiries

This section shows the number of times legitimate businesses have requested a credit inquiry on the applicant. Typically, there are two types of credit inquiries based on their effect on an applicant’s FICO score:

• Soft inquiries are when a business requests an applicant’s credit report not to offer them a line of credit but for personal reasons. These don’t affect the FICO rating as they don’t indicate greater risks. Examples are when you check your own credit or when a landlord requests a background check.
• Hard inquiries are for background checks before a loan or credit approval. These inquiries stay in an applicant’s record for two years, and too many of them can drastically affect the credit rating. This is because frequent loan or credit card requests can signify financial instability.

Eviction Record

Eviction records are one of the most telling items in a background report, throwing light on a renter’s lifestyle and reliability. It’s important to find out why an applicant has a poor history before entering into a lease with them. Most reports contain the following information:

• State and county
• Case type
• The plaintiff’s name and details
• Date of eviction
• Payable amount based on rent owed

Criminal Background

A background check reveals available criminal data from courts around the nation. However, there are no blanket policies on how to consider criminal records while screening tenants.

You must check local laws to see if there are any special considerations for a specific criminalized group. For example, Miracle Village in Florida has a distinctive approach toward one-time sex offenders. It predominantly houses convicted criminals banned from joining any other community.

The Department of Housing and Urban Development states that landlords cannot deny housing to an applicant based on an arrest without conviction. Even for convicted individuals, landlords must make a viable case as to why that person can jeopardize the safety of residents or properties before denying them housing.

Consumer Statements

A consumer statement lets applicants explain their background and criminal reports. It’s a chance for them to explain poor ratings and dispute false accusations. Generally, there are two types of consumer statements:

• Account-Specific Dispute: This type specifically explains an account or a problematic statement. It’s removed when the account or statement is resolved.
• General Statement: These can last up to two years and aren’t about any specific aspect of a report. It explains broader concepts. For example, an applicant’s credit could be poor or low because of fraud, medical debt or a business dispute.

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How To Run a Background Check

According to the FBI’s Internet Crime Report 2022, consumers lost an estimated $396.93 million due to rental or real estate scams. Following that, the FBI Boston division recently released a statement warning consumers about a spike in rental scams.

Due to such a volatile environment, conducting a thorough background check before leasing your properties is crucial. Here are the major steps you should follow to avoid problematic scenarios and safeguard your units:

• Take Consent: The Fair Credit Reporting Act states that businesses can pull a consumer’s credit report only under “permissible purposes” like housing and requires written consent as part of an application form or as a separate document.
• Collect Applications: Design application forms to collect an applicant’s personal details as stated above. Along with that, you can also ask for their proof of income, such as income slips, pay stubs, W2s and bank statements.
• Choose a Screening Service: Tenant screening services are FTC-approved businesses that pull an applicant’s background information for you at a cost. These services can cost between $25 to $150 and include reports on credit rating, eviction history, criminal record, background information, terror watchlists, sex offender registries and employment verification.
• Check References: The best way to catch forgery is by contacting an applicant’s previous landlord and employment centers. Doing so can unearth personal information not available in public records, which adds perspective and layers to the applicant’s profile.
• Know the Law: The most important law concerned with tenant screening is the Fair Housing Act, which prevents landlords from discriminating based on gender, nationality, religion and sexual orientation. It mandates landlords to notify applicants about the reason in case of rejection. They should also provide details about the screening service they used, a free copy of the report and a 60-day period for applicants to dispute any false accusation.

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Popular Tenant Screeners

Here are some of the most well-known screening services you can use for your business:

SmartMove

SmartMove is TransUnion’s all-in-one tenant screening service that allows you to buy reports on a one-off basis without membership programs or subscription fees. You can individually purchase reports on an applicant’s credit ratings, background, criminal history and eviction record.

Its unique feature is the income insights report that reflects non-work expenses like alimony and child-support payments to fairly represent their financial health.

RentPrep

Unlike other screening services, RentPrep doesn’t base its background evaluation solely on algorithms and machine learning. It uses the latest technology to perform screenings but also trains and hires FCRA-certified screening professionals to add that human context along with figures and insights on a report.

It offers discounts and bulk pricing for businesses with more than 50 rental units and provides the following reports:

• Identity check
• Employment verification
• Credit history
• Eviction record
• Criminal background

TurboTenant

TurboTenant is a full-fledged property management software that can not only help you screen applicants but also design leases, accept rent, communicate with tenants, manage maintenance and automate accounting from a centralized platform.

Its partnership with TransUnion lets you generate reports with just a few clicks and then include the screening fee with rental application forms. You can generate reports on:

• Credit ratings
• DTI ratios
• Eviction records
• Criminal background
• Bankruptcy

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Best Practices

• Use consistent criteria: Establish clear and consistent criteria for tenant screening to ensure fairness and transparency throughout the application process.
• Communicate clearly: Let tenants know the screening criteria before starting the process. This transparency helps them self-assess their eligibility and reduces the likelihood of unqualified candidates applying.
• Choose reliable screening services: Opt for reputable services that provide accurate and up-to-date information about credit, criminal history and rental background.
• Notify applicants of results: Communicate screening results to applicants promptly and provide them with the reasoning behind your decision.
• Allow applicant explanations: When negative information arises from the background check, give the applicant a chance to explain the circumstances. This approach shows fairness and can provide additional insights before making a final decision.
• Maintain confidentiality: Safeguard applicants’ personal information and ensure it’s not shared with unauthorized parties to protect their privacy.
• Apply the same standards: Apply the same background check standards to all applicants to avoid discrimination claims arising from inconsistent practices.
• Consider individual circumstances: While maintaining consistent standards, consider any mitigating circumstances or explanations applicants provide when evaluating background check results.
• Maintain documentation: Keep detailed records of the tenant screening process, including application forms, consent forms, and communication with applicants in case of legal inquiries or disputes.
• Use the right software:Property management software takes the administrative legwork out of screening processes. It allows you to focus on making qualitative decisions while automating recurring tasks like maintaining documentation, sending rejection notices, collecting screening costs and recording tenant interactions.

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Next Steps

No more spending sleepless nights wondering if your properties are in safe hands. Tenant background checks take the guessing out of the game and ensure you make a well-informed decision while selecting renters for your properties. But, following all the screening steps every time you receive an application can be tedious, and failing to do so can leave you susceptible to legal repercussions.

With property management software, you can handle every background check process from a centralized dashboard and standardize each step to ensure you don’t overlook any stages while screening a prospect. You can use our free comparison report to analyze the best solutions in the market and find the right fit for your business. So what’re you waiting for? Start your journey today!

What are some of the common challenges you’ve faced while screening prospects? Do you know any other strategies or tools that can streamline the process? Comment your thoughts, and let’s start a conversation below!