Some homebuyers go looking for properties with rental potential, while others buy a home for themselves and later explore the idea of renting to generate income. Whether you expected to be a landlord from the beginning or you're trying the role on for size now that you have a spare room, a guesthouse, or an entire extra property, you'll want to ensure that your tenant can pay the rent.

If you have a guestroom, granny flat, or casita on your property currently serving no purpose, then renting it out will turn wasted space into a moneymaker. Maybe you are thinking of buying a second home—in a milder climate, perhaps near the beach or mountains—with the goal of renting it now and living in it yourself later. Or maybe you'd like to be your own boss and see whether you can replace the income from your 9-to-5 job by gradually building a rental portfolio.

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No matter the reason you would like to be a landlord, becoming one starts with the same step: finding a good tenant. Someone honest, responsible, employed, and considerate.

Among the most revealing methods you will use to screen prospective tenants or roommates is a credit check. In this article we'll tell you:

  • What you need from the tenant to run a credit check
  • Why you should choose a reputable company
  • One or two critical forms and permissions you need signed
  • Methods of further tenant screening
  • How to legally reject someone based on a credit check

What You Need to Run a Credit Check on Someone

Foremost, you need the person's written permission to comply with the national Fair Credit Report Act (FCRA). You can easily capture the signature granting permission as well as the necessary personal details by having the applicant fill out a credit check consent form (the link will take you to a free example PDF). Some rental application forms also include consent language, to kill two birds with one stone.

In addition to providing written, dated proof of the person's consent, the form also captures these necessary pieces of personally identifying information:

  • Full legal name
  • Date of birth
  • Addresses or addresses for at least the last two years
  • Social Security Number

The credit check authorization form is one of two key documents you will need as a landlord. The other is a rental application form. You can easily select your state and start generating an application form using the wizard at eForms. Verbiage at the bottom of the eForm example authorizes a credit check, so you wouldn't need the applicant to sign a separate consent form if you use the eForm example.

Choose a Trustworthy Service

Equipped with the tenant's information and consent, you can now shop for a credit check service. Choosing a reputable company is important because you will be entrusting it with critical personal data not only of the applicant but of yourself. Most companies will require you to submit proof of your identification, current address, and ownership of the property you are renting. You don't want to hand this information to just anyone.

Experian and Mr. Landlord are two sites where you can buy a credit check on a prospective tenant. Many more will come up if you run an internet search, but choose carefully. Be leery of any company who touts how much cheaper they are than the competition; price is not your main concern (later we discuss how you can pass along the cost of a credit report to the tenant). If you have a friend who's a real estate agent, ask what company the agency uses.

How long does it take?

Some services provide results in moments, others in a couple of days. Prices vary widely.

Strive to maintain a business attitude in your dealings with a tenant, sticking firm to deadlines and dollars. You might waive a late fee one month if your tenant faced a steep car repair bill, for example, but don't make a habit of it. Yours is a legal arrangement, not friendship. It's best to avoid socializing with tenants.

Decide Whether to Charge a Fee

Don't pick a credit check service solely by low price, because you probably won't need to pay for it yourself. In most states you can legally charge the prospective tenant a fee for your screening so that the credit check and background check don't come out of your own pocket. California, for example, sets a maximum screening fee of $35 and also requires that the landlord provide an itemized receipt for a credit check fee.

"Be sure prospective tenants know the amount and purpose of a credit check fee and understand that this fee is not a holding deposit and does not guarantee the rental unit," advises Nolo, a do-it-yourself hub of legal advice.

If you step through the wizard at eForms to generate a rental application, one of the questions you will be asked is a price for your screening. So it pays to research a credit check service first, and you should know whether your state sets a maximum amount, so that you will know what dollar amount to enter on the form.

Aside from letting you recoup your cost of buying a credit check, charging a fee has another benefit. The fee weeds out applicants who are just window shopping and not serious about renting from you.

Will You Be Pet-Friendly?
Pet-friendly rentals are in high demand, but consider the drawbacks before throwing your door open to new animals: carpet damage, noise, odor, chewed furniture, fur, allergies, and so on. You may not attract as many prospective tenants if you ban pets, but in the end you might be glad you did.

Further Screening Methods

Other methods of screening tenants include requiring copies of their two most recent paystubs, contacting their current employer and current landlord to verify details on the application form, and a background check. You can run the background check yourself using a public records search engine, such as PeopleWhiz, and all you need is the person's name and location to start. The public records search will reveal much information of interest to you as a prospective landlord, such as any evictions, lawsuits, bankruptcies, and criminal history.

Unlike credit reports, you don't need permission to dig up public records. As a screening tool they rank in importance right alongside recent paystubs. After all, if the applicant's employment history and income are disappointing to you, and a public records search turns up troubling information like lawsuits and bankruptcies and an address history a mile long, then you might as well quit now. Don't bother paying for a credit check; just move on to the next applicant.

If You Reject an Applicant Because of a Credit Check

According to the FCRA, when you use credit reports to screen for tenants, you must notify those applicants who fail your screening.

You must send what's called an adverse action letter or notice. There is no wiggle room, says rental management software providers Rentec Direct. "If you deny a rental application for any legal reason and you accessed any type of consumer report as part of your tenant screening process, you must provide an adverse action notice to the rental applicant."

In this context, consumer reports are any reports that reveal someone's credit history, rental history, evictions, arrests, bankruptcies, and so on. So if a credit check is why you are rejecting a rental application, be sure to document your decision with a brief adverse action letter.

Tenant Screening Takeaways

  • Get written permission before digging into someone's credit.
  • Buy a report from a trustworthy company, not necessarily the cheapest you can find. You may pass along the cost to the tenant as a screening fee.
  • Screening tenants by their credit obligates you to notify them in writing if they fail.
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