Using Credit Score Tenant Qualification

Let’s say you have just received an application from a prospect for your residential rental property. An important consideration for you is going to be her credit history. But what weight should this history have compared to other qualifying criteria, and how important should the credit score itself be compared to other criteria?

As a professional property manager, I put little stock in the credit score itself, but the history used to derive that score is very useful. Credit scores may be useful for creditors that have to justify their decision-making to other higher ranking bureaucrats or perhaps investors. But in the property management business, this is rarely the case. Some professionals, perhaps those less confident in their own judgment or decision-making ability, might ask a property owner to weigh in on the decision, but I rarely do this. Indeed, I think my credit-history interpreting skill is one of the reasons the property owner has hired me in the first place. And truthfully, those that lean too heavily on this sole criterion may be truly seeking only an alibi-someone or something to blame should things later fall apart. While it’s nice to be able to divert accountability, this does nothing to remedy the problem, which was a decision made on a bad premise.

I am certainly interested in the prospect’s overall credit picture, which is what the credit score depicts, but I am really more interested in why and how she got the score. In fact, the score itself is not even considered in my appraisal of the prospect. For example, if our prospect lost her job and had to let her home mortgage go into foreclosure, her score will be ruined for years. But I am more interested in the money management discipline she demonstrated before and after that tumultuous event. That will tell me more about the character of person than the score.

In my qualification decision table, I put the most weight on rental history. I want to know how long she lived in the same place, and how well she treated the property during her stay. Did she pay her rent on time? Were there any bad checks presented? These are the kinds of questions I want answers to, and these are things that do not show up in a credit report, because rent is not considered a debt by the credit reporting bureaus-another reason to be wary of the score, which is generally designed to help creditors evaluate loan risk, not rent.

I am also interested in the tenant’s employment or source of income. Does she have a job? How long has she been employed by the same employer. What does her debt/income ratio look like? How stressful will it be for her to make the rent payments? These are the kinds of questions I want to ask about her payment potential.

I will definitely look at the credit history, but for me, rental history and source of revenue are far more important considerations that indicate the probability that a prospect will become a good tenant.

Daniel R. Wilhelm,
Executive Broker

The author is neither an attorney nor an accountant. Nothing written should be construed as legal advice. Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances. Consult with a professional before making tax or legal decisions.