If you’re wondering how to screen potential tenants, this article is for you!
Tenant Screening: The Benefits of a Disciplined Approach
Tenant screening is THE most important step in the process of occupying a rental property. In this article, we will teach you how to screen potential tenants.
A complete tenant screening ensures that each prospect is fully evaluated on their: credit history, residential history, criminal background and ability to pay.
Slack on any one of these four criteria and you could be in big trouble!
At gkhouses, we maintain a high level of discipline in our tenant screening process. We work hard to drive as much traffic and find the highest quality tenants in the shortest amount of time…and we believe you should too.
When you do this you won’t sacrifice tenant quality just to get someone in your home paying rent.
So, how do we do this?
Let us explain a little bit of our screening philosophy that we’ve fine-tuned over the past 8 years.
1. CREDIT SCORE
Through years of experience, we have found a property price-point split that helps determine our underwriting criteria and believe that this is a very effective method. Our underwriting split is as follows:
Homes above $800/month in rent require an average tenant credit score of 580+.
Homes less than $800/month in rent require an average tenant credit score of 520+.
This lesser credit requirement for approval on homes less than $800/month gives solid opportunities to those with a poor credit history to still have a great house. Because Birmingham is a diverse market we have homes throughout the city that can range from $400/month to $5,000/month for rent.
Having a tiered credit threshold allows us to offer great opportunities to a broad range of prospective tenants.
The detail of a credit report also presents the opportunity to the property manager to look back in the applicant’s past payment responsibility and evaluate what may be an alarming report compared to one that is truly misfortune (multiple unlawful detainers vs. medical bills).
A decline for credit score continues to be seen as the most common reason we can’t allow an applicant to rent one of our owner’s houses. It’s also the most efficient way to judge an applicant’s willingness and ability to pay future rent.
2. RESIDENTIAL RENT HISTORY
A residential rent history will also give you keen insight as to what kind of tenant the applicant may be in your home. After we receive a favorable credit score that meets or exceeds our criteria, we reach out to past landlords in order to hear about their experience with the applicant.
We believe the applicant’s current landlord is a good source of information that a credit score won’t give us necessarily. If a tenant has a borderline credit score and gets rave reviews from their current landlord, we consider that into the decision to rent to them or not.
The same applies…if they have borderline credit but their rent history is weak, we definitely take that into consideration.
The goal is to put the very best tenants into our owners’ houses…this landlord feedback is invaluable. If you’re a landlord and don’t have this as part of your current process, you should!
So what are we looking for?
- History of late payments
- NSF checks
- The balance owed/damage responsibility
- Lease responsibility
- And our favorite question, “Would you rent to this tenant again?”
If a current landlord reports a high number of late payments, we will not take on that risk. This can be a balance owed, bounced checks, and/or damage was done to the property.
There are plenty of prospective tenants out there who have good credit, pay on time, and don’t damage property. Those are the tenants we’re looking for on a daily basis.
3. CRIMINAL BACKGROUND CHECK
You would be surprised how many property managers or landlords don’t make the extra effort to pull a criminal background check.
It helps give us detail on an applicant’s past and is crucial in determining the risk that an applicant may pose to those living in the house as well as their neighbors.
Safety (staff, neighbors, and others living in the house) and liability (owner) are driving factors when determining if we should rent to an applicant. One of the best ways to determine this is through this background check.
We have strict no felonies, no violent misdemeanors, and no multiple misdemeanors policy when considering a criminal background.
In the case that we do see a felony charge over 10 years old, we will consider further underwriting if it is a non-violent felony charge.
To be committed and disciplined in your application process, we believe pulling a criminal background check is a must!
There is a significant investment of time to search criminal background databases and physical court records.
Imagine the scenario if we did not take this extra step and we rented a house to someone with a violent past. It’s not worth the risk and we believe our owners appreciate our diligence in our underwriting process.
4. ABILITY TO PAY
An applicant’s ability to pay rent is another important step in reaching full approval to rent…no surprise, right!?
We believe that if an applicant does not have verifiable income equal to at least three (3) times a home’s rental rate, then he/she poses a higher than necessary risk to the owner.
There is a strong possibility that the tenant will end up not paying.
This is because not paying rent is easier than not buying groceries or paying utilities.
To have ‘verified’ rent we require that income be supported by the following:
- Multiple pay stubs
- Past 3 month’s bank statements
- Previous year’s tax return
- Confirmation with an employer (when applicable)
This time added to wait for an applicant to provide their income documents becomes frustrating to both applicant and owner.
But we maintain our disciplined approach and believe in the long run the owner will thank us for our focus.
We know that if an applicant loves the house they’ve applied for and is truly confident in their ability to verify their income, then they will find a way to persuade their employer to respond to an underwriters fax or call.
You may adjust income requirements to mitigate additional risks discovered in underwriting.
In the case that an applicant has filed bankruptcy in the past (more than a year ago), we will consider approval if the verified income is four (4) times the monthly rent amount of the home applied for.
There you have our underwriting criteria for any gkhouses.com tenant. Feel free to use it for your own rental houses.
The benefits of a disciplined tenant screening process far outweigh the time and costs involved.
There is no better way to protect your investment and forecast a return than to stay disciplined. You will place the most qualified tenants in your house when discipline is your friend.
We hope this article has helped you understand how to screen potential tenants!