Screening tenants is a key part of owning and operating a rental property. Selecting a good tenant can help you keep cash flow strong and potential returns robust, while making the wrong decision could result in an eviction or a landlord being accused of discrimination.
In this article, we’ll look at how to screen tenants, online screening services to use, and important questions to ask a tenant. Let’s begin by reviewing fair housing laws.
- A landlord must treat prospective tenants equally and fairly and follow local, state, and federal fair housing laws.
- There are several protected classes that landlords may not use as a basis for denying a tenant, including race, religion, national origin, familial status, and gender.
- Some cities and states also add additional protected classes, such as sexual orientation or political ideology.
- Steps to follow to screen tenants include requesting a written rental application, running a credit report, conducting a background check, and personally interviewing a prospective tenant.
Know how fair housing laws work
Landlords are free to pick and choose among prospective tenants, provided that all local, state, and federal fair housing laws are followed.
As the legal resource website Nolo.com notes, tenants must be treated equally and fairly, and the same selection standards must be applied to all applicants in the same way. Examples of selection standards a landlord might choose to use include minimum income and credit score, rent-to-income ratio, eviction history, and type of pet if a rental is pet-friendly.
Fair Housing Act
The Fair Housing Act is a federal law that applies to residential landlords. There are 7 protected classes that landlords are prohibited from discriminating against :
- National origin
- Familial status
State and local fair housing laws
States, counties, and local municipalities also may have additional prohibitions to prevent discrimination based upon:
- Person’s birthplace
- Marital status
- Gender identity
- Sexual orientation
- Veteran status
- Political ideology
- Prior criminal record
- Section 8 or other housing subsidy program participation
In most states, property managers must hold a real estate license and are required to take continuing education classes on topics that include fair housing laws in order to keep their licenses current.
Because they’re required to stay on top of federal and local fair housing laws, property managers can make real estate investing easier by helping landlords avoid discrimination.
How to screen tenants
Having a tenant screening system in place helps investors ensure that every applicant is treated equally and fairly and reduces the risk of violating fair housing laws or inadvertently skipping an important screening step.
Here are the general steps to follow when screening applicants for a rental property:
1. Set minimum applicant requirements
Create reasonable expectations and minimum criteria for prospective tenants. Benchmarks may include median household income level, credit score, and employment history.
Setting criteria that are too high may result in a home sitting vacant for much longer than necessary. For example, if the median household income in a neighborhood is $45,000, looking for applicants with an income of $60,000 per year may be unrealistic. On the other hand, setting criteria that are too low relative to the neighborhood norm may result in signing a lease with a problem tenant.
One good resource for learning specific information about a neighborhood is the Roofstock Neighborhood Rating index. The system uses a proprietary algorithm to assess neighborhood-specific risk and benefits based on key attributes. Understanding the profile of the neighborhood a rental property is located in can be a good way of setting minimum requirements for prospective tenants.
2. Request a completed rental application
A written rental application should provide a landlord or property manager with key information about a prospective tenant, including:
- Current and previous employers
- Length of time at their current job
- How frequently an applicant changes jobs
- Gross income and amount of income left over for living expenses after paying the rent
- Monthly debt payments, such as credit card and student loans
- Previous addresses and contact information for former landlords
- Personal references
- Information about pets or roommates.
3. Run credit, rental history, and background check
Credit scores range from 300 to 850 and are an indicator of how financially responsible an applicant is. For example, if a prospective tenant has a low credit score and a history of paying bills late, a landlord may reasonably expect that the rent also will be paid late.
Rental history reports information such as an applicant’s previous addresses, how long the applicant resided at each address, and contact information for each landlord or property manager. A background check reveals any criminal records an applicant might have, along with public records indicating if an applicant is being sued for things that could affect the ability to pay the rent on time, such as a large medical bill or unpaid child support.
Online tenant screening services that provide tenant credit reports, background checks, and more include:
4. Speak with current employer and landlord
After reviewing tenant screening reports, it’s a good idea to make a phone call to verify that the information on each report is correct. Speaking with an employer and current landlord also may be a good way to gather information that isn’t on a report.
For example, a landlord may learn that a tenant has been given a 2-week notice and may soon be out of work. Speaking directly with current and previous landlords may be a good way to learn about how well an applicant takes care of a home and whether or not a previous landlord would rent to the applicant again.
5. Interview the applicant
After an applicant has met the initial requirements, the next step is to meet the applicant in person. While it’s possible to speak over the phone, there are several advantages to conducting a face-to-face interview:
- Verify information on the rental application, such as the number of people who will be occupying the home.
- Discuss any discrepancies between data on the information provided by employers and other landlords.
- Provide an applicant with the opportunity to ask questions about the home, options for paying rent online, utilities, and more.
- Conduct an in-person pet interview if a rental property is pet-friendly.
6. Review all applicants
There’s strong demand for rental property in many cities across the country, and it’s possible a landlord may have more than one qualified applicant to choose from. When reviewing applications from a number of qualified prospects:
- Stick to the original tenant requirements, such as credit score and median household income, to make the selection as objective as possible.
- Avoid going with a “gut feeling” by factoring in subjective criteria, such as making a decision based on an applicant’s looks or lifestyle.
- Consider using a “first come, first leased” approach when all applicants are equally qualified.
10 important questions to ask a prospective tenant
SmartMove by TransUnion is an online tenant screening service that provides various reports, including eviction, credit, and national criminal background checks. In a recent blog post, the company listed 10 questions that should be on every rental application:
- What is your personal information?
- When do you want to move in?
- Who will be living in the property?
- Have you ever been evicted?
- Are you employed?
- Do you have any pets?
- Do you smoke?
- Can you provide good references?
- Have you ever been convicted of any relevant crimes?
- Are you willing to authorize a full background check?
SmartMove notes that, before asking the above questions, it’s important to check with local legal counsel to ensure the questions are in compliance with local applicable laws.
How to turn down an applicant
There are situations in which prospective tenants don’t meet a landlord’s minimum screening requirements and will need to be turned down for the rental property. Here are some valid reasons for declining to rent to an applicant, according to guidelines published by the Federal Trade Commission (FTC):
- The applicant’s employment can’t be verified or work history is minimal.
- The applicant’s income does not support the monthly rent amount.
- The applicant has a low credit score or poor payment history in multiple accounts.
- A rental history report reveals evictions, property damage, or judgments for unpaid rent.
- The applicant’s criminal history indicates potential risk.
An “adverse action” occurs when an applicant is turned down for a rental property. The Fair Credit Reporting Act (FCRA) and FTC require a landlord or property manager to send an applicant an adverse action letter when being turned down.
An adverse action letter should include:
- Name and contact information of the credit reporting agency
- Statement that the credit reporting agency did not determine the applicant should be denied, and can’t give reasons for why the decision to decline was made
- Notice to the applicant that they may dispute the accuracy or completeness of any reports
- Disclosure to the applicant that they may obtain a free copy of their report from the reporting agency
It’s important to keep records of all documentation that provide backup to support the decision to turn a tenant down. Items such as tenant screening reports, interview notes, and discussions with employers or previous landlords can be organized and stored online after signing up for a free account with Stessa, a Roofstock company, or paper records can be stored in a file folder.
When screening prospective tenants, it’s important to follow fair housing laws and credit reporting rules. To avoid being accused of discrimination or unfair behavior, a landlord should be aware of protected classes and never ask questions about things such as race, national origin, or family status. Having a tenant screening process in place helps landlords ensure that all applicants are treated equally and fairly, especially when there are multiple qualified tenants to choose from.