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How to run a (legal) background check on a tenant

how to do a background check on a tenant
by Jeff Rohde, posted in Investment Strategy

A tenant background check gives you a glimpse into a rental applicant’s past behavior, hinting at how they might treat your property and whether they’re likely to adhere to the lease terms. When conducted legally and ethically, a proper tenant screen helps you make fair and informed decisions.

In this guide, we’ll walk you through how to run a legal, comprehensive background check on your potential tenants. From understanding housing laws to interpreting the results, you’ll learn how to safeguard your rental property and maintain a harmonious landlord-tenant relationship, all within the bounds of the law.

 

Legal aspects of tenant screening

Staying within legal boundaries is crucial when screening prospective renters. You must comply with laws like the Fair Housing Act (FHA), a federal regulation enacted to prevent housing discrimination. 

Federal Fair Housing Act

The FHA prohibits landlords from discriminating against applicants based on race, color, national origin, religion, sex, familial status, or disability. That means you can’t use these factors as a basis for rejecting a rental application during your background check process.

State landlord-tenant laws

State landlord-tenant laws cover a broad spectrum, including property maintenance, rent control, lease agreements, and eviction procedures. Their purpose is to balance the rights and responsibilities of landlords and tenants, ensuring fairness in the rental process.

Landlord-tenant laws can vary from state to state and city to city, reflecting the specific housing issues and concerns within those jurisdictions.

Fair credit reporting

Another legal consideration when conducting background checks is the Fair Credit Reporting Act (FCRA). This federal law regulates how you can use an applicant’s credit information.

For example, if you reject an applicant because of their credit report, you must inform the applicant of this. You must also supply them with the contact information of the credit agency that reported the adverse credit information.

Lastly, you must always obtain written consent from the prospective tenant before carrying out a background check. That’s not just good practice; it’s a legal requirement under the FCRA.

 

What to look for in a background check

When screening potential tenants, a comprehensive background check is often the best tool for assessing the reliability and suitability of an applicant. With that in mind, let’s break down the essential components of a thorough background check:

Credit history

An applicant’s credit history offers insight into their financial responsibility and reliability. Look for patterns of late payments, defaults, or bankruptcies that could indicate difficulty in paying rent on time. 

However, remember to balance this information with other factors. A lower credit score might be due to a one-time incident rather than chronic financial negligence.

Criminal record

A criminal background check helps you protect your property and possibly the surrounding neighborhood. While a clean record is ideal, it’s critical to consider the nature and severity of any offenses. Non-violent offenses or those from many years ago may not necessarily disqualify an applicant.

Past evictions

Past evictions can be a red flag. They may suggest a history of non-payment, property damage, or other issues. However, like with credit history, it’s vital to understand the circumstances surrounding the eviction before making a final decision. It’s often helpful to give prospective tenants an opportunity to explain any material red flags on their eviction or credit histories.

Employment verification

Verifying an applicant’s employment status and income is critical to determining their ability to afford the rent and make regular payments. Always ask for pay stubs and/or contact their employer to confirm the details.

References from previous landlords

Landlord references can provide invaluable insights into an applicant’s behavior as a tenant. Ask previous landlords about rent payment history, property care, and general conduct. However, keep in mind that both overly positive and negative reviews may be biased.

While all these elements are pivotal in tenant screening, evaluating them collectively rather than in isolation is essential. Individual circumstances can significantly influence each factor, and a holistic view can give you the most accurate picture of a potential tenant.

 

How to conduct a background check

Conducting a background check on a prospective tenant is more than just a quick look into their history. It requires careful steps to ensure you get the most accurate information. Here’s a detailed guide:

Step 1: Obtain consent

Before running a background check, obtaining written consent from the rental applicant is a legal requirement: 

  • Include a section in your rental application expressly stating you will conduct a background check.
  • Explain what the check will cover (credit history, criminal record, etc.).
  • Adhere to all local and federal laws during the process, including the Fair Credit Reporting Act (FCRA).

Step 2: Collect the necessary information

To conduct a thorough background check, you need certain personal information from the prospective tenant:

  • Ask for their full legal name, Social Security number, date of birth, and previous addresses for the past seven (7) years.
  • Request employment details, including their employer’s name, the applicant’s role, and length of employment.

Step 3: Use a trusted background check service

Choosing a comprehensive screening service can make a significant difference in the quality and reliability of the information you receive:

  • Look for a service that complies with FCRA regulations to ensure accuracy and legality.
  • Prioritize services that provide comprehensive reports, including credit history, eviction history, and criminal records.

One reliable online service for conducting background checks is Stessa’s Tenant Screening. Stessa provides extensive, FCRA-compliant tenant screening services, equipping landlords with the crucial information to make informed decisions.

Step 4: Analyze the results

Once you receive the report, take time to analyze the results thoroughly:

  • Look beyond just the report’s headlines and dig into the details.
  • For instance, if there’s a criminal record, consider the type of crime, when it occurred, and any surrounding circumstances.

Step 5: Use the information wisely

While the information from the background check can help inform your decision, don’t solely rely on it:

  • Combine this information with details from the rental application, personal and landlord references, and your own interaction with the tenant.
  • Remember that everyone has a unique story, so consider all factors before making a final decision.

 

Making a decision

Choosing the right tenant means having realistic expectations and employing a fair, comprehensive approach. Here’s how to set the proper standards to make an informed decision:

Understand your demographics

When setting your standards, it’s crucial to understand the demographics of your potential tenants. Aligning your expectations with the realities of your property and its location can guide your tenant selection process.

For example, a luxury condo in a bustling city might attract more young professionals with stable jobs and higher incomes as your prospective tenants. On the other hand, if the rental property is a family home in the suburbs, you should be ready for applicants with children and possibly pets.

Consider the property type

The type of property you’re renting out also plays an integral role in your decision-making process.

For instance, if you’re dealing with higher-end properties, you may have stricter credit score requirements. Conversely, more modest properties might mean you need to be more flexible.

Accepting guarantors or co-signers might be necessary in situations like student housing due to the tenants’ lack of credit history or employment.

Evaluate the debt-to-income ratio

Another vital factor to consider is a tenant’s debt-to-income (DTI) ratio. This percentage shows how much of a person’s income goes toward paying debts.

A lower DTI indicates that the applicant has a good balance between income and debt. Generally, a DTI ratio of 36% or less is considered healthy. However, depending on the rental market and other screening factors, you might accept higher ratios.

Make fair decisions

Finally, fairness should be at the heart of your decision-making process. Remember to treat all applicants equally and base your decisions on objective criteria like credit history, references, and income stability. Always be transparent about your selection process and criteria.

 

Communicating the decision

Once you’ve decided on a tenant, update your applicants promptly and professionally. This communication is often more than just a courtesy; it’s also a legal requirement in many situations.

Informing the accepted applicant

After you’ve selected the most qualified renter, notify them promptly. You can do so by phone or email. Be sure your communication includes the following:

  • Confirm acceptance of their tenancy and advise them of the next steps, such as signing the lease, paying the security deposit, and scheduling a move-in date.
  • Share details about rent payment methods, property rules, and other pertinent information. 

Handling rejected applicants

Handle rejected applicants with care, both for the sake of professionalism and to comply with legal requirements:

  • If you reject an applicant based on background or credit check information, you’re required under the Fair Credit Reporting Act (FCRA) to provide an “adverse action” notice. This notice should inform the applicant of the decision, the reason(s) behind it, and their right to review the information reported.
  • Even if you base the rejection on other factors, it’s good practice to inform the applicant, preferably in writing. Be factual and respectful, and avoid any discriminatory language.

Recordkeeping

Keeping detailed records of your tenant screening process is crucial for multiple reasons. It helps you track your decision-making process, which can be invaluable if any disputes arise. Also, it ensures you have all the necessary information within reach for future reference, such as contact details, references, and signed agreements.

  • A cloud-based storage system like Stessa’s can significantly simplify your recordkeeping, offering a more secure and organized space to store all documents.
  • Centralize all documents with easy access anytime, anywhere, adding convenience for landlords and property managers.

 

Confidently protecting your investment

A good tenant is more than someone who can afford the rent — they also respect your property and adhere to the lease terms. A thorough background check is your best tool for selecting qualified tenants. It uncovers past behaviors that hint at future actions, helping you make informed decisions and giving you peace of mind about who gets to live on your property.

By conducting background checks legally and comprehensively, you protect your rental property investment, ensure fairness in your selection process, and foster a harmonious landlord-tenant relationship.

Now, it’s time to put this knowledge into action.

Check out Stessa’s Tenant Screening feature for a free, seamless, detailed, and legal way to vet potential tenants. Take the guesswork out of tenant selection and safeguard your investment with confidence.

 

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