Maybe you’ve heard the term “rent debt.” It’s the amount of money owed to landlords, which goes unpaid. The Seattle Times estimated the total of this deficit in their part of the Pacific Northwest to be about $170 million. According to the National Equity Atlas, nationally, more than $10 billion in rent debt is not repaid. While the majority of missed payments are from low-income households, the dramatic increase in late payments and defaults is troubling.
Costs are rising for landlords as well. Repairs and maintenance cost more; property taxes are rising, and government institutions are proposing new limits on rent increases and evictions.
Background checks on tenants have never been more important to protect your property and make sure you are paid.
Warning Signs in Background Tenant Checks
When you conduct a background tenant check, there are several red flags you should look for. When you see them, you need to do additional investigation and consider the circumstances. So, let’s break down the most common red flags and then discuss what to you when you find troubling information in a background check for tenants.
Here are some of the most common items that cause concern.
1. Poor Credit History
A tenant's credit history can provide valuable insight into their financial responsibility. Red flags in this area include:
- Low credit scores
- Multiple late payments or defaults
- High credit utilization
- Recent bankruptcies
- Accounts in collections
While a less-than-perfect credit history doesn't automatically disqualify an applicant, it does warrant further investigation. Consider the reasons for the poor credit and whether the applicant's financial situation has improved recently.
2. Criminal History
Criminal background checks can reveal potential safety concerns. Warning signs include:
- Violent crimes
- Drug-related offenses
- Property crimes (theft, vandalism)
- Sex offenses
Criminal history must be treated carefully. Many places have "ban the box" laws that restrict when and how criminal history can be considered in housing decisions. Always check regulations before making decisions based on criminal history.
3. Eviction History
Previous evictions can be a significant red flag and demonstrate a history of lease violations and failure to pay rent. However, it's crucial to understand the context of any evictions. For example, COVID-19 created hardships and led to many pandemic-related evictions that may not reflect the tenant's overall reliability.
4. Unstable Employment History
Frequent job changes or long periods of unemployment can raise concerns about someone’s ability to pay rent consistently. Red flags might include:
- Multiple short-term jobs in a short period
- Unexplained gaps in employment
- Recent job loss without getting a new job
5. Incomplete or Inconsistent Application
You should also pay close attention to missing information or inaccurate information in rental applications. These could indicate attempts to hide unfavorable information.
6. Negative Rental References
Poor feedback from previous landlords can be a significant red flag. Watch out for reports of late or missed rent payments, property damage, or frequent complaints.
Responding to Red Flags
Before making a decision about what you uncover, you need to know that there are some laws that apply to how to proceed. As an example, the Fair Credit Reporting Act (FCRA) has a requirement for informing a prospective tenant if information in their credit report led you to turn down their application. The Fair Housing Act prohibits discrimination based on race, color, national origin, religion, sex, family status, or disability. There are also state and local laws that apply.
So, you should always check with your legal representative to stay compliant and avoid potential legal problems.
If you find information that concerns you, you should ask the applicant about it. You can ask for an explanation, request additional references or documentation, or verify the information. While rare, mistakes can occur on reports.
You can also look for evidence of positive changes, such as improved credit scores over time or steady employment after a period of instability.
It’s important to look at an applicant’s entire picture. For example, someone might have run into trouble a long time before they landed the job they have today or completed a rehabilitation process after a criminal incident and have stayed out of trouble ever since.
Providing Adverse Action Notices
If you do decide not to rent to someone based on the information you find in a background tenant check, the FCRA requires you to provide an adverse action notice. The notice needs to include specific information, including:
- The name, address, and phone number of the credit report agency (including a toll-free number for nationwide CRAs) that supplied the report
- A statement that the CRA didn’t make the adverse decision and can’t explain why the decision was made
- Notice of their right to a free copy of their report from the CRA if they ask for it within 60 days.
- Notice of their right to dispute the accuracy or completeness of any information provided by the credit reporting agency
- Their credit score (if a score was used)
(Source: https://www.temenos.com/news/2023/12/26/fcra-credit-score-disclosures/)
If you offer to move forward on a lease but offer different terms or rates based on reports (risk-based pricing), you must also disclose this information.
If you are looking for consumer credit reports or background screenings, contact Command Credit today to discuss your needs. You can get on-demand credit reports instantly.