The credit report will provide you with a lot of information about how your tenant handles financial responsibility and the house rules set out in the lease. If you are not using credit reports, we highly recommend that you start now. This is your first line of defense.

This article will look at the basic information in a credit report and consider each area of ​​information to help you write a sample credit policy.

Name and direction:

You must verify that the name and address on the rental application match the credit report.

Confirm the old address on the application with the credit report.

Use a valid driver’s license or other photo identification to help confirm visual identity. Use the driver’s license to confirm the date of birth.

Social Security – A warning indicates an incorrect entry or an identification problem. Ask for some other documentation that confirms the social security number, such as tax returns.

Financial Ratios Monthly income entry must be verified by recent pay stubs, letter of hiring intent on company letterhead, or tax returns (if self-employed)

* Ratio of income to rent: mathematical formula that compares gross income to rent. It is helpful to determine if the prospective tenant is earning enough to provide a comfortable income margin for the rental.

* Income-to-debt ratio: a mathematical formula that is helpful in determining whether your debt burden could interfere with your ability to pay your rent on time. It helps to know that your future tenant can manage finances. Look at the income and look at the debts. This ratio can be helpful, but keep in mind that a mortgage can really create a misleading picture. Look at the business lines.

Business lines: The codes used by credit reports may vary from business to business, but there will be an indication of the type of loan. Home loans must be high and will skew this ratio. You must allow this because owning a home is an advantage. Other types of business lines are installment loans and revolving loans.

Late Payments – These guidelines will help you decide whether your future tenant can easily pay due to high debt. It can help validate a bad relationship between income and debt. If there is enough money but a backward country is indicated, you can consider whether this person is willing to pay on time. People manage money differently and you should consider money management skills as well as ability to pay.

FICO Score – This is a mathematical compilation of payment history, debt burden, and much more. There are over a hundred variables that are used to provide lenders with a mathematical profile that they will use to determine good risk. Scoring range from the minimum of 300 to 800+. The higher the score, the better the credit profile. * Different credit bureaus will use their own proprietary formulas, like Beacon.

Public Records – This area contains federal district bankruptcy records and state and county court records of tax ties and monetary judgments. You should carefully examine this area, but ask your prospective tenant what the circumstances were. Serious monetary difficulties are a sign of trouble.

Illegal Evictions / Detainers: Eviction reports do not appear on the standard credit report unless there has been a monetary judgment. Get all the data you need to avoid problems. This area indicates serious difficulties with another owner and is certainly a reason for rejection. Make sure the name and address match exactly. Often times the scan will get similar names and it may not be your prospect that was evicted.

Policy Considerations:

Income to Rent Ratio – Many landlords / managers will see a verifiable gross income of 3 times their monthly rent. You may consider combining the gross income of all residents of the unit to obtain a family income. You may consider increasing the multiplication when using more than one income to get the 3x grade. Make sure you read our Fair Housing articles and treat everyone consistently.

Income-to-debt ratio: You should set a number that reflects the tenants’ ability to pay. Very high debt loads can cause difficulties with timely payment of rent. Establish a red line and apply it evenly to all applicants.

FICO Score: You may want to research the average credit score for your region to use as a basis for what is acceptable to you. Some average statistics reported by Fair Issacs (developers of the FICO score) as of September 2005 are as follows:

1. Average number of credit obligations: eleven

2.30 days late payments – 40% have never been late

3. 60-day late payments – 20% has never been late

4.90 days late payments – 15% has never been late

5. Default values: 10% have never reported a breach

Guarantors – When your guidelines are not met, you may need a guarantor or co-signer. You should have an application, verifiable income, and a good credit report. You may consider stricter financial guidelines, as the guarantor would be responsible for both their own rent or mortgage and the applicant.

Public records: Bankruptcy, bonds, and money lawsuits are serious business. Generally, bankruptcy will not be filed after seven years. If you are accepting applicants with these problems, you must decide on a time frame. Is a bankruptcy or money judgment of more than two years acceptable? You can seek the advice of a real estate attorney.

Evictions: Is there a reason for an eviction? Set clear rules, write them down as a policy for everyone to see, apply them equally to everyone, and stick to them.

Howard Bell for yourpropertypath.com