Rental References
A typical rental application asks the applicant for information regarding his rental history, employment history, income, financial accounts, credit card accounts, loans, other debt obligations, and references.
References in this context usually refer to personal references, those who would provide a character reference for the applicant.
Rental references are risk assessment tools. As such, to protect his business, a landlord should consider a broader definition of rental references to include landlord references to evaluate past rental history and credit references to evaluate the applicant’s credit worthiness.
Most landlords consider background checks, credit reports, and eviction history the most important screening tools. However landlords should not discount the value of screening rental references to fully analyze and evaluate the applicant’s potential for financial risk to the landlord or possible problematic tenancy.
Previous Landlords Referrals
Most experienced landlords recommend asking the applicant to provide rental history for the past three years. Usually that timeframe will provide one or two prior landlord references in addition to the most recent landlord reference. Checking with fellow landlords provides a way to further qualify the applicant. The purpose of landlord reference checking is to find out whether the applicant as a former tenant paid the rent on time, kept the rental property in good condition, was considered a good neighbor, and otherwise materially adhered to the lease agreement. With factual information about the applicant’s past rental behaviors, a landlord can assess whether the applicant is likely to be a future good tenant.
However there are some applicants who have limited rental history, no recent rental history, or no previous rental history at all. Refusing to consider such applicants may significantly extend the vacancy period. For any of these applicants a landlord should consider contacting personal references as a qualification tool in the screening process.
Personal References
Personal references differ from landlord references in that that a personal reference will be an individual that has never rented to the applicant. Personal references are character references offered by family, friends, business associates, community leaders, etc., who can personally vouch for the applicant.
Some landlords feel that such references are of little value, since most applicants are not likely to provide the name of someone who would give a bad reference. The fact that information obtained from personal references can be difficult to quantify and assess in measurable terms also leads some landlords to use this source of information sparingly.
Other landlords view personal references as a third party opinion, and while acknowledging the potential for bias, recognize that behavior observed over a period of time can be indicative of future behavior.
Credit References
A credit reference is an entity or individual that has extended credit or otherwise established a financial relationship with the applicant.
An applicant can be asked to provide a credit reference who will vouch for the applicant’s credit worthiness. A rental application when approved has financial obligations. A landlord in offering tenancy is extending credit to the selected tenant for the term of the lease. The landlord wants to ensure the applicant is not a financial risk and has the ability and willingness to fulfill terms of the lease in full and timely rent payments. A credit reference furnished by the applicant should provide details of the loan amount, the terms of the loan, and the payment history.
Some landlords may not realize that credit references are already a part of their tenant screening practices. A credit report obtained from a national credit reporting agency is a credit reference. Landlords have traditionally used the credit report as a cornerstone of tenant screening. A credit report provides the landlord with the reported history to date of the applicant’s credit usage and credit management. A consumer credit report will list open and closed accounts, the type of credit, the total amount of loans, balances due, and payment history. Additionally the report will list any accounts sent for collection. A landlord considers this credit data in factoring the risk of rent default, delinquencies, or collection or requiring additional security such the full security deposit amount as allowed by statute, or a co-signer or guarantor for the lease.
A bank financial statement showing available account balances could be considered another type of credit reference. Utility providers, telephone service providers, or local businesses extending payment terms may also provide credit references.
Whatever the type of documented credit reference, the reference should point to the applicant’s credit ability and reliability in making payments as agreed.
However there can be situations where a consumer’s credit file does not contain sufficient credit usage data to generate or score a credit report.
The credit information reported to national credit reporting agencies (NCRAs) is the consumer’s visible credit activity. There are consumers who don’t have visible credit history and consequently no credit score. To the major credit reporting systems they are credit invisible.
As an industry standard, a credit report/credit score is visible evidence of the degree of financial risk and brings into play the applicant’s credit management, i.e., his ability and reliability to pay according to terms. Without a documented pattern of credit behavior, the end result is most likely to be an application denied.
Credit invisibility can occur through consumer lifestyle choices. Some consumers voluntarily choose to not use credit. Other consumers are limited in personal options or by their utilization of services that do not report to the major credit bureaus. If there is no report of credit, there is no credit report.
Some consumers have a credit record at one of the NCRAs but the record is considered unscorable, sometimes referred to as a thin file. These consumer credit records have insufficient information to generate a score because there are too few accounts in the credit history or accounts are too new to calculate a reliable score. An unscorable credit record may also be as a result of outdated or stale information in the file, usually a lack of reported credit activity within the past two years.
A credit profile is usually built from information about the consumer’s mortgage loan, auto loan, consumer credit cards, and other types of loans, such as student loans. If the consumer rents from a non-reporting independent landlord, did not finance his car, does not use credit cards, and did not have a student loan, there is very little information that could be sent to the NCRAs. The consumer may have actively used credit responsibly in the past but has since closed or stopped using his accounts. Those inactive accounts eventually drop from the consumer credit file.
Credit reports function as a centralized source of information. An information void creates a problem. The creditor knows nothing about the credit invisible consumer and has only rudimentary information about a thin file consumer. A landlord has no way to know whether the applicant will turn out to be a good pay, a slow pay, or a no pay.
A consumer deemed credit invisible may actually have a strong history of debt repayment according to terms and conditions of non-reporting creditors. Being invisible does not mean the consumer is not credit worthy. An applicant whose credit report comes back as thin is not automatically a person who has made poor credit decisions and missed payments. In some ways a thin file applicant is credit neutral. Some consumers, visible, invisible, or thin are credit worthy, some are not.
An applicant knowing that he has a thin file or chooses not to use credit may want to provide the landlord with credit references as an alternative to the traditional credit reporting model.
Checking References
References of any type are of little or no value unless the landlord puts some effort into checking them and evaluating the information in an objective manner. Landlords can cross-check applicant information with information obtained from the reference to help determine the truthfulness of the applicant’s statements. All adults who will sign the lease agreement should be tenant screened, including the landlord’s requirements for rental references.
Documentation
All contact with rental references, oral and written, should be documented in detail, with date of contact verified reference source, and discussion items. In some states, there may be a requirement for disclosure of all screenings that will be conducted in the application process to screen and qualify rental applicants.
Applicant Consent to References Screenings
A landlord should conduct due diligence for applicable laws for permissible purpose to conduct screenings qualifying a rental applicant. Written signed consent by the applicant to conduct tenant screenings may be required by state statute or local ordinance. There could also be requirements as to the timeframe when screenings could be conducted.
Rental references are only a part of a comprehensive policy and practice for tenant screening and selection. Good references alone cannot guarantee a good tenant. With good tenant screening practices, there is less chance of installing a problem tenant.