Essential Tips for Tenant Screening: A Guide for DIY Landlords

As a rental property owner, you recognize that your lease agreement, along with local, state, and federal regulations, outlines your obligations to your current and potential renters. A responsible landlord intends to fulfill their legal obligations and commitments and seeks to find a tenant who will reciprocate. But how can you, as a landlord, ensure that you choose reliable tenants from your pool of prospective renters for your property?

Begin with a clearly articulated and comprehensively researched Tenant Selection Criteria (TSC) or Renter Criteria. Your TSC should be documented in writing to ensure consistent application for all applicants. Any case-by-case actions should lead to an update in your TSC, applicable to all similar cases, to avoid illegal housing discrimination and to ensure compliance with Fair Housing laws.

Utilize your tenant selection criteria to establish approval levels for your applicants. Common approval levels include:

• Standard approval - indicating that all your criteria have been met.

• Conditional approval - suggests that your criteria highlighted certain qualifications that are less than ideal but are risks you are willing to accept in return for a higher security deposit to offset the added risk. You might consider that these factors do not justify denying the application, but they are exceptions to your ideal tenant profile.

• Lastly, there is the "denial" status, which should identify a prospective tenant that you have strong reasons to believe will not likely meet their lease obligations.

So long as your TSC does not violate any laws, particularly Fair Housing laws, or otherwise result in illegal housing discrimination, you can set your criteria to whatever you believe is necessary to identify your ideal renter. However, we highly recommend that you consult with your attorney as Fair Housing Laws are often described as laws you do not know you've violated until you have violated them.

Utilizing our years of professional property management experience, we recommend that your TSC cover the following:

• Credit Worthiness

• Income

• Rental History

• Civil Court Case Record

• Criminal Record

A significant portion of this information will be derived from the renter's screening report supplied by your renter screening service. These reports usually contain details related to your credit, civil court record, and criminal record criteria. If you lack a renter screening service, a quick Google search for "Renter Screening Services" or "Tenant Screening Services" will generate a list of services for you to consider. Gaining necessary information to measure the prospect against other areas of your TSC might require more manual effort, which we will address later.

Credit Criteria

Your credit criteria will define the credit score and/or the acceptable credit factors of your ideal rental applicant. When determining your acceptable credit score range we recommend identifying the median credit scores for your area. According to Experian, the average FICO credit score in the US is 715. Not considering average credit scores can cause you to eliminate a significant number of prospects from your renter's pool unknowingly.

When evaluating the data on which you base your criteria, it is important to narrow the data as close to your relevant audience as possible. While you may get renters from all over the nation, you're more likely to get renters from the area of the subject property. Thus, if your property is here in North Carolina, it may not be best to look at a 715 average, when the average in North Carolina is 699.

We recommend researching credit bureau and credit monitoring service websites to utilize their credit health meters to understand what is a poor, fair, good, very good, and excellent credit score range. Couple this information with the average score for your area to narrow in on an acceptable range for your tenants. You should set three ranges based on the following thoughts:

• Range 1: This credit score and above is my ideal tenant;

• Range 2: I'll work with this tenant in exchange for an increased security deposit for the added risk I'm taking.

• Range 3: This score and below is unacceptable as I find it too risky.

In addition to identifying your acceptable credit score parameters, you also may want to identify credit factor parameters. This defines how you handle the specific results of a credit report such as collections, write-offs, judgments, bankruptcy, and late payments. It also identifies whether you exclude any factors such as medical and student debt, paid-off debts, and closed bankruptcies. When identifying credit factor parameters, you should define the following four things:

• Credit Factor: What should I review in a credit report (Late Payment, Collection Account, Outstanding Balances, etc.)?

• Quantity: What number of occurrences of the specific credit factor will be acceptable?

• Lookback: How old is too old? At what point will we not consider the particular credit factor?

• Value: What amount is too high?

You may decide to keep things simple and go strictly based on the credit score. You may decide to review credit factors for applicants in your conditional approval range. Perhaps you desire to require all applicants to meet both the score and the credit factor parameters you've set. Whatever you decide, the key is consistency. Apply your TSC the same way, every time.

Income Criteria

Your income criteria should identify your required rent-to-income ratio, acceptable forms of income, and acceptable forms of income verification. It is common in the residential rental industry to require that residents gross three times the monthly rent in monthly income. This stems from the 30% rule on housing affordability. It is also common to require that residents net two-and-a-half times the monthly rent in monthly income. Whatever ratio you decide and whether you base it on gross income or net income, the key is to apply it consistently across the board.

After establishing your income limits, the next step is to decide which types of income you will accept. Considering that a lease is for a specific period, you might want to focus on income sources likely to last throughout the lease term. Although most employment relationships are at-will and not guaranteed to last for the entire lease duration, they still have the potential to do so. Conversely, some income types, such as temporary employment income, unemployment benefits, and student loans, are likely to be short-term. As a landlord, it's important to decide in advance which forms of income you will accept. When choosing acceptable income types, ensure they are verifiable and specify the forms of income verification you will require. Be precise; for instance, stating that you accept employer letters as income verification is too vague. Instead, specify that you accept employer letters on official letterhead with verifiable employer contact information, or sent from the employer's business email address, excluding personal domains like Gmail or Outlook.

Rental History Criteria

Neglecting previous landlord verifications is becoming more common due to unresponsive landlords slowing down the application process. However, skipping this step might not be advisable. In every aspect of your TSC, you rely on past performance to predict future behavior. There's no better source than the applicant's history with their former landlord. To verify rental history, creating a previous landlord questionnaire is a common practice. You can also find Landlord Verification/Rental History Templates online. These forms should be sent directly to the landlord. Besides inquiring about payment history, make sure to ask about damages, unauthorized occupants, unauthorized pets, and other lease violations. Your TSC should specify what constitutes an unfavorable rental history, which you use as a basis for denials under this criterion. You should outline the following when defining your rental history criteria:

• Findings: Late Payments, Unauthorized Occupants, NSF, Outstanding Balance, etc.

• Quantity: How many of the findings above can exist before you consider denial?

• Timeframe: If the resident resided in the previous residence for multiple years, is the quantity specific to a timeframe (i.e. no more than 3 late fees in a 12-month timeframe).

• Value: Is there a minimum value you will exclude (i.e. outstanding balances below $100.00).

Civil Court Case Record Criteria

The majority of tenant screening services offer searches of civil court case records, essential for conducting eviction screenings. It's crucial to establish your lookback period for evictions. Any eviction within this timeframe should lead to rejection. However, consider the context of an eviction. Can the potential tenant provide dismissal documentation? Will a landlord's verification support the applicant's account? Was the applicant the complainant, suggesting a constructive eviction?

Civil court records may also show monetary judgments. Your criteria should determine the acceptable number of judgments and the relevant timeframe. Decide the threshold for exclusion as well (e.g., any monetary judgments over $200 within the past 3 years will lead to denial).

While resident screening services may provide adequate searches of civil case records, it is highly recommended to perform your own due diligence, particularly in counties with online access to court case records. We have found that occasionally, due to the timing of filings and when the screening search took place, some information may be missed. Adding this extra layer of protection guarantees a more thorough overview. To identify which counties to examine, many resident applications request applicants to provide their residence history for a certain number of years. This information can then be utilized to search online court dockets for the relevant states and counties.

Finally, ensure that you clearly distinguish between a filing, an ongoing case, or a concluded case. If you are examining a court filing or an ongoing case, it should prompt further investigation before using the information to determine your applicant's screening status. If the case is concluded, it is reasonable to apply your screening criteria to the case's results. However, remain open to consideration if the applicant presents additional information that may change your view of whether the outcome of the case meets your defined standard for denial.

Criminal Criteria

It is important to review the criminal criteria of your applicant for the following reasons:

• To evaluate if the applicant might physically damage the property;

• To evaluate if the applicant poses a potential threat to the staff or the community;

• To evaluate the risk of the applicant causing the property to be declared a public nuisance; and

• To evaluate the risk of fraud or deceit before entering into a contractual agreement.

As a property owner, you are entrusting a stranger with one of your most significant investments. You are committing to interacting with them for a set period, with a strong likelihood of needing to have difficult conversations at times. They will either live in a community where other residents rely on you to best ensure a quality living experience or in a neighborhood with people who were once your neighbors and are now your friends. It is in the best interest of many people (including yourself) to assess not only your prospects' ability to meet the financial requirements of the lease but also their capacity to respect both property and people, and you must do so without engaging in illegal discrimination.

When setting your criminal criteria, it's important to consider certain fair housing issues. Firstly, some criminal charges might stem from disabilities like crimes relating to alcohol abuse. Although alcohol abuse can affect a person's ability to respect others and property, individuals who are actively working towards recovery should be given consideration. Failing to do so could constitute a fair housing violation based on disability or handicap status.

Another issue is disparate impact. Law enforcement and the criminal justice system have disproportionately affected African Americans and Latinos compared to Caucasian Americans due to racial profiling and discriminatory policies, rather than differences in criminal activity. Therefore, broad criminal criteria may also disproportionately negatively impact one race, color, or national origin more than another. Since race, color, and national origin are protected classes under Fair Housing, this could lead to illegal discrimination. Thus, it is important to take certain precautions:

• Never consider charges or arrests, only criminal convictions.

• As with all other criteria, define your parameters: What is the lookback period for specific conviction types? Do certain conviction types require a history of repetition for disqualification? What consideration should be given to a time gap since the conviction?

• Whenever suitable, be open to digging deeper by examining the particular details of the conviction and its impact on the applicant's capacity to adhere to the lease terms, which includes respecting your property and not violating their neighbors' right to peacefully enjoy their homes.

Risky Business

There are many things to consider when screening residents and when establishing your screening criteria. Your application process is littered with fair housing pitfalls, which can come at a high cost if not avoided. Always be consistent, ensure everyone understands they are welcome to apply, and be open to extenuating circumstances that may result in an override of an application decision due to looking at the circumstances differently, not looking at your criteria differently. Whenever you override an application decision, document the specifics of why you did it and be sure should the exact situation arise in the future, you apply the same logic and reasoning so that everyone is treated the same.

If you've read this post and thought, "Wow, this sounds riskier than juggling flaming swords," you're spot on! We wholeheartedly agree. That's why we suggest leaving it to the pros at KAM Realty Group. We'd be thrilled to take on your property management challenges—no flaming swords involved!

The information in this post is for informational/educational purposes only, and is not meant to be taken as legal advice. We encourage you to consult with your attorney when developing or putting in place your tenant selection criteria.