Determine Your Applicant's Credit Worthiness
David Borden - May 26, 2015
Know an Applicant’s Credit Worthiness – In tenant screening, credit history is the single biggest factor in determining the risk involved in renting to a prospective tenant. A consistent record of paying one’s debts is an accurate measure of their care and concern regarding their financial reputation. To determine credit worthiness property managers (Usually there is a 100 unit minimum) can apply with the major credit bureaus to gain access to a prospective tenants credit reports with a tenant’s permission. Property managers can use the data to determine the probability that a tenant will fulfill the obligations of the lease. Of the three credit bureaus (Transunion, Equifax, and Experian), it is our opinion at the time of this document that Transunion has made the biggest investment in creating a model specific to the rental industry.
The “Resident Score” available through their credit retriever product employs millions of records to predict a tenants’ probability of fulfilling their rental obligations based on their score. This is the single most effective tool in determining the probability of paying rent. Other variations of FICO scores and financial modeling only predict an applicant’s probability of paying their general bills. For landlords and smaller property managers this information can be difficult to obtain. The three credit bureaus will not approve individuals, small property managers, or those that manage their businesses out of their homes to obtain consumer credit reports.
This means that these parties must find a way to obtain the necessary information to make this decision. There are a number of third party services including RentScreener that can give landlords information to make a better decision, but they cannot provide the actual credit reports to a landlord. The key is determining the probability of the tenant paying their rent and determining the risk associated with extending credit to each applicant. Once a property manager knows which score thresholds translate to which probability they are comfortable with, they can create a tenant screening policy that they can use to power their tenancy decisions. No model can eliminate risk. Sometimes even the most qualified applicants have problems, and don’t pay rent. The key is understanding the risk involved in renting to every applicant and making a decision based on that risk.