Tenant Background Checks (What Every Landlord Must Know) - Accidental Rental (2023)

You know that tenant screening and running tenant background checks are two of your most important jobs as a landlord. It often makes the difference between success and failure in the rental property business. But do you know what features to look for in tenant background checks?

I thought tenant background checks were pretty much all the sameuntil I did some investigating.It’s important to know how tenant background check services work andtheir limitations.

In this article I will:

  • Explain thedifferences between tenant credit reports and tenant background checks
  • Describe thedifferent types of tenant background check services
  • Review thepros and cons of each type of tenant background check service
  • Tell you whatfeatures you want in a tenant background check report and how to use them

TenantCredit Report Versus Tenant Background Checks

In addition to asking important tenant screening questions(link), your process for vetting potential tenants must include two criticalreports:

  • Tenant Credit Report
  • Tenant Background Checks

Learn more about each of these critical landlord tools below.

TenantCredit Report

Most landlords are familiar with tenant credit reports. I don’t know any landlord who rents an apartment without, at the very least, running a tenant credit report. But again, not all tenant credit reports are equal and there is a lot of confusion between the different types of scores.

What Does ATenant Credit Report Tell You?

A tenant credit report is designed to predict a potential tenant’s rental payment performance. Will they pay their rent on time, every time?

Here’s an example tenant credit report from TransUnion:

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There are three main components of a typical tenant creditreport

  • TenantIdentification
  • Credit Score
  • CreditHistory

Landlords need to use all of this information to make an informed decision.

How To Use A Tenant Credit Report?

TenantIdentification

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You need to make sure you are reviewing the credit worthiness ofthe person you will be renting to.This section of a tenant credit report generally includes yourapplicant’s name, aliases, known addresses and where they work. You should cross check this informationagainst their application and inquire about any discrepancies.

Depending on the tenant credit reporting service you choose, youmay also get the tenant’s date of birth and Social Security number. Most leave this personal informationoff and simply tell if you the SSN matches their internal records associatedwith this person.

In the above example pro report from Experian, you can see an applicant’s “best match” info long with “other” info that may be older and not match the current info provided by the applicant.

Credit Score

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A tenant’s credit score is meant to be a short hand forunderstanding their ability to pay the monthly rent consistently. However, all credit scores are not thesame!

It’s too complicated to get into the details in this article butyou should know that every credit reporting bureau has their own way of scoringtenants. These proprietary scoresare designed to be more meaningful to landlords because they are designedspecifically to measure tenant credit performance. After all, paying rent everymonth is different than opening up a credit card.

And these scores are not the same as a tenant’s FICO score.

Don’t be confused. It’s easy to know which type of score you are looking at and make an informed decision. Tenant credit reports generally tell you where the score comes from. It’s usually from a major credit bureau unless it specifically says it’s a FICO score.

What’s A Good Tenant Credit Score?

Only you can ultimately decide what is a good tenant credit score but most landlords I know like to see a score of 650 or higher.

Here is a distribution chart of credit scores according to Experian:

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CreditHistory

You should always get a tenant credit report that includes a detailed credit history. The devil is in the details as they say.

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Always review the history.Never rely on a score alone.

Credit histories usually include:

  • Detailed credit accounts and payment history
  • Credit Inquiries
  • Negative public records such as liens

PRO TIP: A prospective tenant’s credit history includes the critical information that tells you if your tenant can and will pay their rent! Never accept a tenant based solely on their credit score. Always look at their detailed credit history too.

TenantBackground Checks

In order to properly screen your tenants, you need to go beyond a credit check. A tenant background check should be part of every landlord’s tenant screening process!

WhatDoes A Tenant Background Check Tell You?

Tenant background checks will reveal many potential issues thatmay cause you to deny a prospective tenant. Things such as criminal records, too many addresses in ashort time, or income that is different than what was reported by the tenantcan be red flag indicators of a potential problem tenant.

However, not all tenant background check services are the same. You need to know who is running the check, where they get their data and the limits of the information provided.

Pros& Cons Of Different Tenant Background Check Services

You can classify tenant background check services a fewdifferent ways. Each type comes with a few trade-offs. No type of tenant background check serviceis perfect. They all havelimitations. Depending on yourneeds, however, some might be better for you than others.

The most meaningful differences in tenant background check services are found between Instant and Manual services. See how they compare below.

Instant Tenant Background Checks

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Instant tenant background check services are widely popular because they can return a background report in minutes. They match a prospective tenant based on the email you provide and the private information the prospective tenant provides. Once they have a match, they pull all the information they have against that match and serve up a tenant background report.

PROS CONS
Fast turnaround minimizes
vacancy
Can’t search certain states
Tenant-initiated, “soft” credit pulls No accuracy check
Usually an option for Tenant to pay directly Can’t be run without a Social
Security Number
Minimal phone support

Pros of Instant Tenant Background Checks

FastTurnaround – The fast turnaround time means you are not waiting days for atenant background check report with an empty rental.

Soft Credit Inquiries – Instant credit reports are usually tenant-initiated making them a ‘soft’ inquiry, which will not impact the applicant’s credit rating.

Tenant Pays – There isusually an option for the landlord to pass this cost on directly to the tenantas well. This may not be legal inyour state so be sure to check first.

Cons of Instant Tenant Background Checks

Missing Info – There are 5 states that do not allow direct access to their databases for instant searches including Wyoming, Delaware, South Dakota, Colorado and Massachusetts. If you are doing in business in or around these states then you shouldn’t use an instant tenant screening service.

No Quality Check – There isn’t anyone reviewing the tenant background report for errors and omissions. You want to make sure you are looking at a background check for your applicant and not someone else. Furthermore, you don’t want to reject an applicant based on a false positive or using older (and possibly illegal) information.

SS# Required – Most instant tenant background checks cannot be run without the applicant’s Social Security number. That’s because this is the primary method of matching an applicant to their personal data in the big databases. If your tenant doesn’t have a US Social Security number, then you will need to use a manual background check service.

Minimal Support – Finally, instant tenant background checks will usually not come with phone support if you need to get a hold of someone. You will generally have to use a Contact form or email.

Manual Tenant Background Checks

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Manual tenant background check services boast that they provide a thorough tenant background search because they research the prospective tenant manually. These tenant background check services run instant reports that pull from the same databases as the instant services do.

However, the main difference is that the manual services then verify the information and check it for accuracy.

PROS CONS
Full state searches Takes hours to days to complete
Accuracy checked Usually Landlord paid
FCRA compliant report Can’t run detailed credit reports
Can call employers and landlords
Weekend phone support

Pros Of Manual Tenant Background Checks

Full Search – Manual tenant background check services are able to search all state records because they perform the search manually

Quality Control – They are also able to review the data that instant databases return and verify it against other data to ensure it is correct and FCRA compliant

Verification – Manualtenant background check services can call to verify information such as employmentand prior landlord references

Phone Support – You canreach someone when you need to, often with weekend hours

Cons Of Manual Tenant Background Checks

SlowerTurnaround – One of the leading manual background check services claims tobe able to turn around many reports in an hour. Some take up to a day or longer. That extra time costs money in lost rent.

Landlord Paid – These services typically don’t involve the tenant so there isn’t an option to charge your applicant directly.

No Credit Report – These services will not return a full credit report although many resell credit reports from one of the big data collectors for an added fee.

What’sIn A Tenant Background Check Report?

While tenant credit reports tend to include similar information regardless of the service, tenant background check reports can vary widely depending on which service you choose.

Here is a list of the most common things you can expect to find in a tenant background check report.

Criminal Background

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A criminal history search is a must-have in any tenant background check. Your search should include a national search especially if your rental borders several states. Instant tenant background services cannot run a check in all states due to restrictions in some states.

Be sure your tenant backgrounds check service searches your state and surrounding states before purchasing a report. If your rental is in or neighboring Wyoming, Delaware, South Dakota, Colorado, and Massachusetts, you may want to go with a manual tenant background service or supplement an instant check with a DIY check in these states.

County vs. National vs. Federal Searches

There is no single database with all criminal records. Instead, tenant background checks rely on a network of databases to accurately identify any criminal records associated with your potential tenant.

County Criminal Records

Generally, most criminal activity is recorded at the county level so these tend to have the most information. But not all county level data is recorded at the state level in every state. There are 3,142 counties in the US according to Wikipedia.

No tenant background search will pick all of these up so to be very thorough you should include a search of the criminal records in the counties where the applicant has lived.

Federal Criminal Searches

Not to be confused with a “national” search, Federal criminal searches are focused on federal crimes. All such criminal records are housed in one database. This database will tend to cover fraud, bank robberies, and large-scale drug trafficking that are covered by federal jurisdictions.

RestrictionsOn Using Tenant Criminal History In Housing Decisions

Every landlord should be running a criminal background check on their tenants. That much is clear. But how are you supposed to use that information? To what extent can you base your decision on the information you find? This isn’t as clear. Here are some things to consider.

Can I Use Criminal History In Housing Decisions?

Yes. Landlords can use a tenant’s criminal history as the basis for denying an applicant because criminals are not a protected class under the Fair Housing Act. However, HUD has issued guidance limiting how you can use this information in housing decisions.

According to HUD, “While the (FHA) does not prohibit housing providers from appropriately considering criminal history information when making

housing decisions, arbitrary and overbroad criminal history-related bans are likely to lack a legally sufficient justification.”

In other words – you better have a really good reason and not have an overly broad approach.

Convictions vs. Arrests

Some tenant background check services report anything your tenant has been charged with, not just crimes that ended in a conviction. While this is good information to know, you need to be careful using this information when making housing decisions.

Furthermore, HUD says “A housing provider with a policy or practice of excluding individuals because of one or more prior arrests (without any conviction) cannot satisfy its burden of showing that such policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest.”

In other words – you can’t consider arrests that do not result in convictions.

Consistency Is Key

Be consistent in your process and decisions. You cannot use the information or apply a different process for different protected classes of applicants. Here is an example of a violation:

“A housing provider rejected an Hispanic applicant based on his criminal record, but admitted a non-Hispanic White applicant with a comparable criminal record.”

What’s the bottom line for us landlords? We should know what criminal records our tenant background check provider is reporting and have a consistent, fair process that complies with federal, state and local laws.

Homeland Security

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Homeland security searches are designed to find potential problem tenants who might be suspected terrorists, money launderers or individuals you shouldn’t be doing business with. They fall under a couple of different laws and jurisdictions.

Patriot Act

Section 352 of the Patriot Act requires every financial institution, including people involved in real estate transactions to establish anti-money laundering procedures. I’m not a lawyer so I didn’t try reading all of the literature on the subject, but it appears that even accidental landlords like ourselves should be complying with these laws.

OFAC (Office of Foreign Assets Control)

OFAC is a department of the US Treasury that enforces trade sanctions against terrorists, drug dealers and other bad actors.

Not all tenant background check services offer this search. Some only offer it in their premium packages. Be sure your report includes a Homeland Security check or document that you are searching on your own.

You can click in the image below to search your current tenants at the Department of Treasury. Hopefully, none of your tenants show up on this list!

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Sex Offender

Most tenant background check services will include a sexoffender search in their basic tenant screening reports. However, there are different databasesso be sure they are running a national search. You may want to supplement this with a state and localsearch of your own to be thorough.

Can I Use SexOffender Status In Housing Decisions?

Sex offenders are not a protected class under the Fair Housing Act so landlords are not required to rent to them. However, the laws are mixed in this area.

On the one hand, some states restrict where an offender can live indicating a landlord has a duty to use this information in housing decisions.

On the other hand, some states such as California specifically do not allow you to deny housing on this basis. Learn more about California Landlord-Tenant laws.

It’s a tricky area. Talk to a local housing authority or lawyer when in doubt.

EvictionHistory

Prior evictions predict future ones. According to TransUnion, an applicant with a prior eviction is almost 4X as likely to have another eviction than an applicant with a clean record. See the chart below:

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Clearly eviction history is important. Every tenant background check should come with one but notall do. Furthermore, not alltenant eviction searches are nationwide.Be sure your tenant screening service includes a nationwide evictionssearch.

Also, instant tenant background check services only returnevictions where the landlord won the case. They don’t report eviction filings. Most eviction cases never make it tothe final stage. They are usuallysettled long before then.

Even if your prospective tenant doesn’t have an actual eviction judgment against them doesn’t mean they haven’t been in trouble many times before. Manual services do turn up this level of information.

Income Verification

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It’s not just the leaky toilet at 3:00 AM that keeps us Accidental Landlords up at night. It’s also the worry that our tenant will not pay the rent. That’s why income verification is a crucial part of the tenant screening process.

Most landlords require a tenant’s income to be at least 3x themonthly rent. But how do you knowif they actually make that much?You verify with pay stubs, tax returns and any other corroboratingevidence.

Some tenant background check providers offer “incomeverification” features in premium packages. However, these may just really be estimates of a prospectivetenant’s income based on their spending history or bank statements.

LeaseRunner gains access to an applicant’s bank records to create a financial profile for example:

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SmartMove (TransUnion) uses an algorithm based on their spending and payment patterns to determine if your tenant probably has the income they claim or not.

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Call me old school, but I still like to see a few pay stubs to be certain they make what they say they do. Plus it also reveals any red flag deductions like wage garnishments!

EmploymentVerification

Some tenant credit reports come with a list of employers. This is not an employment history. It is a list of employers’ a tenant haslisted on credit applications. It’slisted to simply help identify an individual.

Manual tenant background check services can call employers toverify the details of an applicant’s employment history.

RentPrep (affiliate link) offers to make up to 3 such verification calls for an extra $12. A useful feature if you are the shy type.

RentalHistory Verification

Similar to Employment History, some services can call an applicant’s current and former landlords to get the real skinny.

See how RentPrep (affiliate link) does it in this video.

AddressHistory

In addition to rental history, landlords should want to know allthe addresses associated with a prospective tenant.

Address discrepancies versus the tenant’s application can be anindicator of fraud. It can alsoreveal an applicant who has jumped around and might be a “skip” risk. Address histories can also tell you ifyou need to broaden your criminal search to include other states not previouslydisclosed.

Address history can easily be verified via a tenant backgroundcheck.

The 3 major credit bureaus will report the addresses associated with the tenant’s credit lines (bills, loans, etc.). SmartMove’s tenant credit report tells you right at the top if the addresses associated with an applicant doesn’t match.

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Manual tenant credit check services can obtain this information from resellers such as utility companies.

Social SecurityNumber Verification

Landlords need to ensure the person applying for their apartmentis the same person whose background check report they are running.

Arguably, the best way to do this is via the tenant’s socialsecurity number.

Some tenant background check services will use other personalidentifying information such as names and addresses to verify the SSNmatches.

Manual tenant background check services such as E-renter can run the SSN through the Social Security Administration’s verification tool. The tenant background check report will then come back with a “Valid” or “Invalid” result.

An Invalid result is a major tenant screening red flag requiring further investigation.

Bankruptcy

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Whether you rely on instant or manual tenant background checks, either should reveal any bankruptcy judgments against your prospective tenant.

Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy is known as a “liquidation bankruptcy.” This is where your tenant sold or“liquidated” personal assets to repay a portion of outstanding debts. No further payments are made. Chapter7 Bankruptcies stay on a tenant’s credit report for 10 years.

Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy is known as a “reorganizationbankruptcy.” This is where yourtenant can keep their property but must make payments over the next 3-5 years. Chapter 13 Bankruptcies stay on a tenant’scredit report for 7 years.(Confusing. Right?)

Can I Reject A Tenant Due To Bankruptcy?

Landlords are generally allowed to reject an applicant due to apast bankruptcy. However, thecredit reporting agencies are not allowed to report a bankruptcy more than 10years old. Some CRAs stopreporting them after 7 years.

In either case, a landlord should not reject an applicant because of a bankruptcy older than 10 years.

Judgments /Liens

Tenant credit reports used to show any judgments and liensagainst a prospective tenant.However, over the years there have been a number of changes to the waysthe credit bureaus report these types of negative items.

  • In 2015, thebig 3 credit bureaus stopped reporting non-loan related collections such asoutstanding traffic tickets.
  • In July 2017,they stopped reporting any judgment or lien that doesn’t meet a higher standardof matching to an individual. Thisis estimated to have resulted in a jump in credit scores for millions of people.

I don’t know about you, but I want to know if my potentialtenant refuses to pay their gym membership.

Can I Reject A Tenant Due To Judgments/Liens?

Landlords are allowed to use negative judgments and liens as a basis for rejecting a tenant. Similar to Chapter 13 bankruptcies, these are only reported for 7 years so landlords generally shouldn’t consider judgments older than that.

Conclusion

Running a tenant background check is a crucial step in the tenant screening process. You need to know what information a tenant credit check can provide versus a tenant background check. There are so many services that it can be hard to choose. But they do not all provide the same information.

It’s also important to understand the differences and limitations of Instant versus Manual tenant background checks. If you live in or near one of the five excluded states, you need to use a manual tenant background check service.

It’s even more important to know how to legally use the information you receive from tenant background checks.

  • Never apply a different standard for a protected class
  • Never consider judgments older than 7 years (10 years for chapter 13)
  • Use caution when considering criminal, sex offender or other sensitive information when making a housing decision

To learn more, check out the epic guide to tenant screening services which provides a 26-point comparison of the top companies.

Next Step: Writing A Custom Lease

Once you’ve screened and found the perfect tenant, it’s time to write up a custom lease that protects you and complies with your state’s landlord-tenant laws. The Landlord’s Guide to Writing Great Leases can show you how.

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