Establishing Tenant Screening Criteria For Rating Tenants
This is part 3 of our Landlord’s Guide to Tenant Screening. If you’ve landed here directly, don’t worry — we cover tenant screening criteria in-depth below.
Establishing tenant screening criteria is not always fun and easy. It might feel like you’re showing your cards unnecessarily or taking decision-making out of your hands by listing your criteria. However, the more prepared you are the more confident you may be in finding a highly qualified tenant.
Setting Up Tenant Screening Criteria: Sample Form
It is a little extra work up front and it does make your screening process more rigid. But, it’s imperative that a landlord set up their tenant screening criteria when screening potential applicants.
Some refer to this document as a rental criteria form and in other parts of the country it is referred to as a tenant selection criteria form. These names can all be used interchangeably.
Now, let’s take a look at why you’d want to incorporate one into your tenant screening process. Tenant screening criteria will help you create a system for how you judge tenant applicants and rock solid defense in a discrimination claim.
Think of tenant screening as an applicant filling out a robust scantron form. Your criteria act as the answer key and unlike a regular test you can share it with your applicants before they apply.
This will tell them upfront what your standards are and a thorough background check will show you if they pass or fail. Is it more work to set up your criteria? Yes, but it’s also easier to grade applicants once you have criteria in place for your rental.
How To Use Tenant Screening Criteria To Defend A Discrimination Claim
We covered the FHA in chapter two of this tenant screening guide. The FHA is regulated by HUD, and it’s pretty easy to submit a discrimination claim with them.
It’s just a Google search and an online form. It would take a motivated applicant less than four minutes to find and fill out. HUD will take a look at the claim and may reach out if it seems serious.
The claim might be something like the following, “I feel I was denied because”:
- I have kids
- of my religious beliefs
- of my race
- of my sexual orientation
As of August 16th, 2016 the fines for violating the FHA are as follows:
- No priors $19,787
- One prior: $49,467
- Two or More Priors: $98,935
So if you’re found guilty of violating the FHA as a first-time offender you can receive a civil fine of up to $19,787. That does not include other fees such as attorney and court costs.
That being said, what is something you could say when HUD calls about discrimination?
“Yes I remember ______ they seemed upset when I denied them the rental, but I provided them with my screening criteria, and they did not pass my criteria. They did not meet my rental history and credit requirements. That’s why they were denied the rental. I could show you a copy of my criteria if you like.”
In this conversation, you clearly show that you have a system and you have specific legal reasons why you denied them the rental. You don’t want to answer this question with, “I had a bad feeling about this renter, so I denied them.” Hopefully, this little pitch will drive home the point that it is worth the time to set up your criteria.
Here’s more information about how to use tenant criteria in your rental listings:
The Rental Criteria Form: What To Know
In the sections below we will break down each aspect of your new form. We will discuss why it’s important and what you should be aware of. This is important, so you understand how to stay in compliance with your laws.
As a reminder, make sure you read and understand your state and local laws. For instance, in Texas, you’re legally required to present your criteria to applicants during the application process, and you must get a signature showing they saw it.
What Rental Property Information To Include In Criteria
Here’s what you should include about your investment property when creating tenant screening criteria.
Address Of Property
Landlords should include the address of the rental property, and the name of the landlord or property management company needs to be clearly stated.
Description Of Property
Provide initial details about the rental property on the tenant screening criteria document. This way, if applicants discover something that they don’t want or need a place to live, they can remove themselves from consideration right away.
What Is Expected
You may have already mentioned your stance on smoking several times, but your criteria is another mention that might check someone off your list. If animals and smoking are not allowed, it should clearly state so. If animals or smoking are allowed, the document should state the details of what is allowed.
For example, an animal policy might include how many, what size, restricted breeds and anything about a pet deposit. If the prospective applicant is not immediately in line with any of this property information, they will not even fill out the rest of the application. This self-selection will save both parties a lot of time and effort.
Note: Most refer to it as a “pet policy,” but after recording this podcast on ESAs, we’ve adjusted the language to an “animal policy.” Please give that podcast a listen if you’re unfamiliar with the laws surrounding service animals and emotional support animals.
How To Verify Rental History Criteria
Sometimes, there is always that one tenant that is late on rent or had issues with the rental. Lucky for you, landlords can use rental history as a tenant screening criteria.
There is perhaps no better way to discover what kind of tenant an applicant will be than by looking at what type of tenant they’ve been in the past. The most telling piece of information discovered during screening is whether an applicant has been evicted. Eviction is the legal action of expelling someone from a property.
There are specific steps that landlords must take to carry out an eviction, and the result is a hearing in court. The eviction becomes part of the public record; therefore, a background check will reveal any made against the applicant.
Part of the tenant screening process includes talking to an applicant’s previous landlords. These landlords can reveal plenty of rent-related information about an applicant:
- Number of late rent payments
- Complaints about the tenant
- Did the applicant ever break the lease agreement
- Did they have to deduct and damages from their security deposit
Here’s a mock phone conversation where our CEO Stephen White shows you what to ask when calling a previous landlord. Now let’s say you called the previous landlord and your applicant has excellent rental history but poor credit. Rental history can be used to complement a credit history that may not be as pristine.
For example, even if applicants have experienced some credit difficulties, they may still be eligible to rent. That’s because the landlord can set complementary or conditional criteria for credit history and rental history. They can set a lower credit score, for example, but higher rental history standards. This allows applicants to be eligible to rent with fair credit if they have paid rent on time every month for the length of their last lease.
You could have verbiage added to your document like this:
“We require a credit score of 620 or above. If the applicant’s credit score is 550 to 619, they can still be accepted with conditions. We would require an increased security deposit of a certain amount and an increase in their rental history to 24 months with the same landlord. The applicant must also have an increase to 18 months of employment with the same employer. If the applicant has a clean history with the previous landlord, they will be considered if all other conditions stated above apply.”
Of course, the rental history criteria must be applied equally to every applicant to avoid discrimination.
Income Requirement Criteria
An income requirement is very common for landlords and property management companies to use in evaluating an applicant. A background check on the applicant must show sufficient income to be approved to rent a unit.
Landlords require each applicant to supply proof of their current income. They are looking for all income, such as salary, child support, Social Security and similar streams of income.
Landlords generally use an applicant’s gross income (what is earned before taxes and withholdings) to figure out someone’s rent-to-income ratio. The higher the total verifiable income, the better that rent-to-income ratio will be, which increases the applicant’s chance to qualify for the rental unit.
Some landlords must use the combined income of every adult on the application that will be living in the rental, such as in a roommate situation. When landlords use an income-to-rent ratio to help them screen applicants, they are most likely looking for a 3 to 1 ratio of income to rent or around 30 percent of total gross income.
Ratio Based On Multiplier Of Rent
Here’s what to include in your ratio when trying to determine just how much rent you should be charging for your rental property.
- Your monthly rent
- What is your multiplier (2.0 – 2.5 – 3.0 – 3.5)
- Gross minimum renter should make per month
- Gross minimum renter should make per year
To make this easier, we’ve put together a spreadsheet to help you calculate.
If the rent takes up too much of an applicant’s monthly income, landlords worry that they won’t be able to take care of the rent each month. Landlords don’t want future tenants to have to choose between paying rent and something else because their budget is too tight.
3 To 1: The Unofficial Rent Standard
Financial experts have determined that when people spend not much more than a third of their income on rent, they still have enough money for other living expenses like transportation, groceries and more.
In some places, generally urban centers and major cities, this ratio is almost impossible to abide by, and it becomes more like 40 percent of their income. However, most landlords want to see their tenants making three times the rent to give them peace of mind that they will always be able to make the payments on time and in full.
Income must be verified during the tenant screening process. This is usually done by contacting the applicant’s current employer to supply an employment verification request. The landlord can also request recent paystubs or W2s from the applicant to confirm income. Other sources of income beyond salary should be verified with the appropriate documentation as well.
Employment History Criteria
Besides income verifications, many landlords choose to use employment history as part of their screening criteria. The screenshot above shows the employment history on one of our SmartMove reports.
A promising applicant should have a solid work history that does not show job-hopping, employment gaps or a steady income. If these warning signs are present in an applicant’s employment history, it could indicate a past or potential difficulty in paying rent due to unstable employment habits.
It’s a good idea to call the employer to verify the dates and income listed on your rental application because databases have a tough time verifying this type of information. Here’s a video on how to make these types of calls.
Sometimes applicants list unusual employment backgrounds, such as self-employed, commission-based or similar situations.
These don’t make the applicants any less qualified, but the landlords will need to request slightly different documentation. The most common is a copy of the most recent tax return or several months of bank statements.
This is to show a consistent income level that the landlord can feel comfortable with. It also proves that the applicant can sustain a certain income level to meet all their needs.
When it comes to employment history, landlords must decide their screening criteria to consider whether working in the same industry is fine for a certain number of years or if they prefer at least six or twelve months or more with the same employer only.
Sometimes a younger applicant may not have extensive employment history and landlords should take that into consideration. If all the other aspects of a background check work out, but the employment history is limited, landlords should find out why and use that information accordingly. As always, the criteria must be applied to every application rather than selectively.
Credit History Criteria
With tenant screening criteria, most landlords include a credit check to provide a detailed look at the applicant’s financial situation.
Credit history is one of the essential parts of the applicant’s past. Landlords must impose the same credit report standards on all applicants for the rental.
However, a landlord can have different credit standards on various rental properties. For example, they can’t just choose to run a credit report on single moms or people of only one race. Landlords must treat every applicant the same and use the same credit history criteria when making their selection.
The credit bureaus assign a credit score that indicates whether the consumer has bad, poor, fair or good credit. Most landlords set a minimum standard for an applicant’s credit score as part of their screening criteria.
Depending on the location, type of unit and comparable applicants, landlords can set the credit score higher or lower as they wish. Once that score is set, however, it must be used against all the applicants equally.
Credit reports can cover anywhere from seven to ten years, so it’s easy to identify any positive or negative patterns. A credit report will show a landlord if the applicant has ever been evicted.
It can also show whether the applicant is deep in debt, late on their bills or if there is any kind of civil judgment in their name. Most landlords are familiar with debt and paying overdue bills but may not know much about the impact of a judgment, lawsuit or lien.
Civil judgments are official legal pronouncement that paves the way for one party to recover funds from the delinquent party. Judgments, lawsuits or liens are among the most serious of financial challenges, and they have a serious and lasting impact on a credit report. Examples of the causes of a judgment or lien include large medical bills, unpaid taxes or unpaid rent/eviction.
In July of 2017, many judgments and liens were removed from credit reports. This was part of an initiative by the credit bureaus to not penalize people with medical debts and other various outstanding debts. You can read about that initiative here.
When the judgment is paid off, the organization is supposed to submit documentation to the credit bureaus that the debt has been satisfied.
However, if they don’t, the judgment would remain on the applicant’s credit history. This information remains there for up to ten years, as opposed to seven years for a typical credit item.
When considering civil judgments as part of an applicant’s credit history, many landlords take certain things into consideration. For example, if the judgment was seven to ten years ago and the applicant has shown fiscal responsibility since then, the landlord may feel that is acceptable.
As part of a landlord’s credit screening criteria, they should decide whether any judgments will be allowed for approval and if so, what the circumstances are for the criteria. Again, landlords must apply the criteria to every applicant equally, not selectively.
Public Records Criteria
As part of the screening process, a landlord may use an applicant’s criminal record to evaluate their potential as a tenant. When landlords use a criminal record to accept or reject applicants, there are certain steps they must follow to avoid being accused of discrimination.
When reviewing an applicant’s criminal record and creating screening criteria for criminal history in general, there are several things landlords need to consider. Examples include what the offense was and how serious. Other factors include how recent the incident was and whether they were convicted.
Landlords should evaluate how many offenses there were and whether they were clustered around a certain time or spread out over many years. Finally, landlords should consider whether the offense would potentially put other residents at risk or negatively influence the applicant’s ability to pay rent. Many states are passing laws that prohibit landlords from denying an applicant based solely on criminal history alone.
Landlords can only reject applicants with specific criminal offenses that could jeopardize other tenants or the rental property. Even though the Federal Fair Housing Act doesn’t explicitly include people with criminal records, it issued strong guidelines on what landlords can and cannot do with criminal histories to avoid discriminating against minorities (statistically higher percentage of the population with criminal records).
Among the most common crimes that landlords are legally able to deny an applicant include murder, kidnapping, theft, assault, robbery, sexual offenses, arson, drug-related offenses and similar crimes that might affect people or property.
With a comprehensive list of specific offenses in their tenant screening criteria, landlords can comply with fair housing guidelines while keeping other residents and their rental property safe.
For even more tips on tenant screening, check out this video:
Stay Compliant With The Law
Tenant screening is subject to numerous federal, state and municipal laws. Landlords can ensure they are compliant by learning everything they can about the laws that apply to their business and their properties.
Screening criteria is an excellent way for landlords to find the right tenants for their rental units, but if they don’t follow the established rules and regulations, they can find themselves in a lot of legal trouble.
Landlords should always consult with their attorney to ensure their tenant screening criteria, and their tenant screening process is legal, fair and effective. With the right tenant screening process, landlords will be able to identify the best applicants and offer them a lease agreement.