Property Management Blog - Tips, Articles and Advice from RentingYourHome.com

The best way to deny an applicant is to be short, sweet, and to the point. If the decision was based in part or in whole on their credit score, then you are required to provide them with the recourse to obtain a free copy of their credit report. Prepare a standard letter or find someone who can provide one to you. You are only required to information them:

1. Their rental application has been denied,
2. A notice that the decision was in part, or in whole, made based on their credit score,
3. As such, they are entitled to a free credit report, and
4. The contact information for the credit agency used.

This protects your legal liability, establishes clear and appropriate records, and effectively resolves your problem.

You should never get into a protracted conversation with someone about why they were denied. Nothing good will come from having a detailed discussion about why you think they are not good enough. Denied tenants can be defensive, aggressive, and difficult. If you do have a discussion with the denied tenant, and they feel your decision was based upon discrimination, they'll get ready help from the local tenant advocacy groups. Your only defense in court will be documentation proving that the decision was made on non-discriminatory grounds, and the only reliable proof of that is your letter stating the decision was made in part, or in whole, because of their credit! And your decision is ALWAYS based at least partly on credit…

After all, I wouldn't rent to an obviously dangerous crack cocaine dealer even if they had a 700 credit score…my threshold for dangerous criminals is an absolute perfect 800 credit score and no lower! So, it's always in part, or in whole, about their credit score.

Many landlords keep sloppy records or don't get the tenant's signed authorization to run credit checks. The rules are getting more strict about when you can run credit, who is authorized to run credit, and how that information can be used:

When You Can — You may only run reports on potential tenants that you are currently screening for a valid vacancy in a rental property that you own, manage, or are the agent for. You are also required to get that potential tenant's written authorization to run a credit report.

When You Cannot — It is illegal to run credit reports on yourself, family members, friends, or for any fraudulent purpose. Your account with the credit-checking agency will be immediately terminated in accordance with the Fair Credit Report Act (FCRA) guidelines if you do so. Failure to comply with the FCRA can result in very serious state or federal enforcement actions, as well as private lawsuits. In addition, any person who knowingly and willfully obtains a consumer report under false pretenses may face criminal prosecution.

Once you have the credit report, you are not allowed to provide that report to the tenant. In practice, most landlords let the tenant see the report but I think that's a bad practice. The report is yours - you bought it - and you're using for a business purpose. Do that business and make a rental decision. Let the tenant know the outcome of the decision and leave it at that.

Finally, once you've approved or denied that tenant's application, since 2006, you're required to destroy that credit report immediately. But, don't forget to retain the rental application and record of running a credit check to protect against Fair Housing claims. You gotta love regulation!

For more information, see the:

• Fair Credit Reporting Act (FCRA) http://www.ftc.gov/os/statutes/fcradoc.pdf;
• Federal Trade Commission website http://www.ftc.gov/os/statutes/fcrajump.shtm

Everyone knows that you're "supposed" to pull a prospect's credit history before making a rental decision but a lot of folks don't know what to do with a raw credit report. What's it good for and how do you use it?

Credit reports are one tool to evaluate the likelihood that a tenant will pay their debts (your rent) on time. Scores range from 440-800. Each report will show the amount of each type of debt they have, whether they have ever paid late, and if the late payment was ever resolved. In addition, some court judgments against tenants will show up on the credit report and are a good indicator that a tenant may not pay on time. Ideally, a landlord wants a tenant with a good credit score (above 680) in addition to other favorable characteristics-good job, adequate income, low likelihood of causing damage to the property, etc.

Deciding on whether to accept a tenant with poor credit depends on your situation, how badly you need to rent the property, and whether you can do anything to increase the likelihood that the tenant will pay on time. As a rule of thumb you want someone who doesn't currently have too much total debt or a history of nonpayment.

A "worst case" credit report might look like this:

• FICO score of 480
• Over 90 days past due on bank credit card for $4,800
• Over 180 days past due on auto loan for $54,000 (on an annual salary of $35,000)
• A court judgment for delinquent payment to a former landlord for $3,800

A "best case" credit report might look like this:

• FICO score of 720
• Has 2 credit cards, one auto loan, and 2 school loans, all paid on time.
• Total debt is $18,000 (on an annual salary of $85,000)

If there's something on the credit report that you don't understand, or that looks really bad, ask the tenant about it. Ask tenants about specific items that cause concern. Watch and listen to their response. If your gut says, "I don't trust their answer" then stick with your gut. But, they'll all have a story and sometimes the story makes sense too.

I had a tenant with horrible credit who warned me ahead of time. He explained that in his early twenties he had no idea how to be responsible with money and made a lot of mistakes. Over the past 18 months, he had been paying down his debts, downsizing his home and expenses, and trying to get back on his feet. We put him on an automatic recurring rent payment plan and he's been a fantastic tenant ever since.

Often times, applicants will forget to:

1. sign hard copy applications,
2. correctly print their date of birth
3. correctly print their social security number, or
4. complete the entire application.

In addition, we've seen a number of rental applications that don't explicitly ask the tenant's permission to run a credit check. Without that kind of a statement, you may not have legal authorization to run their credit. The rules on running credit checks changed in 2006-2007; they're getting harder. If you can't prove that you've been given authorization to run a tenant's credit, you may be violating the Fair Credit Reporting Act (FCRA).

When doing background checks on prospects most former landlords and professional property managers will require that you provide proof that you've been given authorization to run background checks before they'll share past rental history. A signed rental application with necessary authorization is what they're looking for.

So, when you take a rental application, make sure to triple check for the required information before a prospect leaves. And always, always get their signature authorizing you to conduct a background check on their behalf.

The things that make up your credit score are pretty straightforward and it doesn't take a "Fix Your Credit With Us" agency to do the basic repairs yourself. Here are the components:

1. High outstanding debts - keep balances low on credit cards and other revolving credit. One ratio the agencies look at is the level of actual debt versus available debt. In other words, if you have available credit of $19,000 on your credit cards, it is bad to have an actual balance of $18,900 on those cards. Having $1,000 or less is much better.
2. Late payments - note that paying off late / collection accounts will not remove them from your report. These accounts will stay on for seven years unless you get a letter of deletion from the collector.
3. New accounts - If you have been managing credit for a short time, do not open too many new accounts too rapidly

Help your tenants to manage these three pieces of their credit and you'll be doing them a great service. Not only are you teaming with them to provide a home, you'll be helping them build a better life.

A FICO score is current industry standard ranking for how likely a person is to pay their debts on time. Scores range from 440 (terrible credit) to 800 (perfect credit). The components of FICO are:

• Payment History - 35%,
• Amounts Owed - 30%,
• Length of Credit History - 15%,
• New Credit - 10%, and
• Types of Credit Used - 10%.

The bottom line here is that to get a good credit score, you do actually have to have credit. The FICO score is being phased out of the industry in favor of new risk-ranking techniques, but a lot of people still use them. In general, they just help to indicate how good a person is at paying off the debts they agree to pay.