Alexandra Alvarado
Director of Marketing and Education, American Apartment Owners Association (AAOA)
Many landlords don’t realize that credit reports alone leave out five crucial pieces of applicant data.
1. Prior evictions
In 2017, the three major credit bureaus under the National Consumer Assistance Plan removed nearly all eviction judgments from credit reports. This means that you can’t tell if a rental applicant has been evicted just by looking at their credit report, and their credit score will be unaffected by an eviction. In other words, a decent credit score isn’t enough to make an accurate risk assessment. It is crucial that you make sure every tenant screening report includes a separate eviction report.
2. Small claims judgments
Landlords often take a tenant to small claims court if they move out while owing rent or if their security deposit did not cover the damages they left behind. This is a key piece of information that virtually all landlords would want to know about, especially if the court judgment was never paid. However, a small claims judgment won’t be on a tenant’s credit report or eviction report.
In some cases, if the tenant was taken to court and did not pay the court judgment, then the landlord may use a collection agency to collect the amount owed. Collection agencies usually will report the collection to the credit bureaus, in which case the collection will appear on the tenant’s credit report and negatively impact their score. However, if a previous landlord did not use a collection agency, there will be no record of a judgment on the credit report.
Small claims data is especially important in states that have had eviction moratoriums in place that don’t allow landlords to evict, but do allow landlords to sue their tenants in small claims court for unpaid rent. Many cases that would have been filed as an eviction before the pandemic will instead be filed as a small claims case, which won’t appear on a credit or eviction report.
3. Tax liens
Tax liens are a red flag when screening a tenant. Although taxpayers experiencing an economic hardship can still contact the IRS to request a temporary delay of the collection process, the penalties and interest will continue to accrue until the full amount is paid.
If your applicant has a tax lien against him or her, their wages will likely be garnished until they’ve paid the full amount, which may affect their ability to pay rent. Again, this is information you wouldn’t find on a credit report.
4. Employment history & income
Although a credit report will occasionally include a consumer’s last few employers, the credit bureaus do not guarantee that this employment information is kept up-to-date in real time. Additionally, income isn’t reported or factored into a credit score. An applicant with an acceptable credit score should not be approved if they don’t have sufficient income to comfortably pay rent. All sources of income, including employment, should be verified for every applicant regardless of their credit score.
5. Rental payment history
Up until recently, only large corporations could report rental payment history on a credit report. Now there are new services that help smaller landlords report rental payments as well, but there are still very few landlords reporting. In most cases, you won’t find rental payment history on a credit report.
Knowing an applicant’s rental payment history is important because some tenants may be in the habit of falling behind on rent, only to catch up when a landlord serves them an eviction notice. Other times, landlords may never bother to take a tenant to court because they don’t expect the tenant to ever pay them back. For them, it’s more hassle than it’s worth.
The first step every landlord should take is to investigate what data they are currently getting from their tenant screening provider. Do you get a credit report, eviction report, and public record report with small claims and tax liens? Make sure your screening provider offers all these options or do your own research to find the records you likely won’t see on a credit report.
Next, you should be sure to ask all of your applicants for employer and landlord references as well as supporting documents such as pay stubs, bank statements, or W-2s. Some tenant screening companies may even verify references for you for an additional fee. Either way, this is a step you should never skip.
Evictions, small claims cases, and tax liens are expected to rise this year due to the financial strain the pandemic has caused. Make sure you’re getting a full picture of the applicant you are considering. Most importantly, remember that a decent credit score isn’t enough to make an intelligent rental decision. Do your research or use a comprehensive screening service to ensure that you never miss a red flag again.