What Credit Checks Should You Be Doing on Someone Looking to Rent Your Home?

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What Credit Checks Should You Be Doing on Someone Looking to Rent Your Home?
Article Excerpt

The US rental market has seen a lot of disruptive change in the past few years due to the pandemic, but 2023 is looking to be the year of a return to more sustainable normalcy. Though it’s not all going to be smooth sailing, the market is looking to become more favorable to renters as rent starts to flatten.

As a landlord, this also ends up in your favor in the long run as it brings back more demand in a balanced way to supply. Halfway through the year, you can also start increasing rental prices once vacancy goals are sorted. With the right outlook and management, it’s looking to be a promising year.

Naturally, the most important factor to consider here is whether or not you get renters that will be good for your ROI. Other payables come into play, depending on whether you have land loans vs home loans that need to be met using your property rentals. In order to ensure your own financing, you must consider your renters carefully with the right credit checks.

Doing Soft Credit Checks

When you have a potential renter, it’s a good idea to pull a soft credit check to make sure they’re good candidates. Hard checks aren’t necessary, as they will require you to get the renter’s approval and will likely turn applicants away as they will show up on their credit score. When considering hard vs soft credit checks, note that you can get all the information you really need with a soft check.

A soft check will already cover the financial data you’ll want to get a look at without affecting the applicant’s credit score. Another advantage to this is that you can do it without having to inform them, so it’s a good screening tool that is efficient, discreet, and accurate.

Soft credit checks already paint a good picture of the individual you are considering to lease out your property to, but there are specific factors to look at when checking credit. You can check these out in more detail in the next points.

Credit Score Check

The first thing you want to look for is their credit score. Although this isn’t an all-encompassing factor for someone’s character, it does give you a good idea of how good they are at managing their money. More importantly, it helps gauge how likely they are to pay their debts.

For better context, the average American citizen has a credit score of 714. Anything below 670 starts to look a little problematic, with scores in the 300 range are major red flags that should give you some pause.

Financial History

A soft credit check should have the potential renter’s financial history, which you should at least skim through even if you already know their credit score. Knowing what lines of credit, outstanding debts, and history of payments a person has can help you measure the risk of renting out to them.

Not only does this let you see any missed payments and recurring payables, but it also gives you another way of confirming their identity.

Delinquency Checks

Delinquency is a major credit check that shouldn’t be looked past. You’ll see these appear if the individual has payments that are past due for more than 30 days. The last thing you want is a headache trying to get your rental payment, so it’s worth looking at this.

It should be noted that simply having one in their credit report may not necessarily be indicative of their entire financial habits, so you don’t need to immediately panic if you see that. More worrisome things to look for are County Court Judgements and bankruptcies.

Debt to Income Ratio

Checking out a person’s DTI is not just a safeguard for you, but also prevents you from taking on a renter that simply might have a hard time meeting rent. It can be very taxing to overextend yourself when trying to hit payments that are taking too much of your overall income.

Considering how much debt someone has compared to what they’re getting can tell you whether or not they can afford to rent out your space. It may even help you consider what rental fees are fair to both you and the renter. In general, a good DTI ratio should not be more than 45 percent. That said, it’s worth noting that the average quarterly DTI ratio for Americans is more than 100 percent.

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