Tenant screening serves as a critical tool for landlords to assess the suitability of prospective renters for their rental property. The screening process involves analyzing various aspects of a potential tenant’s background to ensure they meet the rental criteria established by the housing provider.
When a prospective tenant submits a rental application, a tenant screening report is generally processed to determine whether to offer the rental applicant a lease and, if so, how to set the security deposit - assuming one is needed.
Rental Application Screenings
To create a comprehensive tenant profile, these rental application screenings synthesize data from multiple sources, including a tenant's credit history, eviction record, and employment status.
Depending on the rental property, the components of a tenant screening report can be extensive and may include:
- Detailed credit reports and/or credit scores that reflect the tenant's financial reliability.
- Rental history checks shed light on past evictions or related lawsuits.
- Verification of employment confirms income stability.
- Searches through criminal databases and sex offender registries.
- Assessments against national terrorist watchlists.
- Standardized or custom-parameter risk assessment scores, which may be based on property-specific criteria.
Consumer Reporting Agency Database
The Consumer Financial Protection Bureau (CFPB) maintains a current directory of consumer reporting agencies, which includes those specializing in tenant screening.
Credit Report vs. Tenant Screening Report
Recognizing the distinction between tenant screening and credit reports is important.
A credit report and a tenant screening report provide different insights for landlords evaluating prospective tenants. A credit report details an individual's credit history, including loan repayments and credit account statuses, which speaks to their financial responsibility.
In contrast, a tenant screening report offers a broader view of an applicant's rental background, including eviction history, criminal records, employment verification, and checks against various registries, to assess their overall suitability as a tenant.
While both reports are valuable, the tenant screening report gives landlords a more complete background profile that extends beyond financial reliability to include factors that could influence the tenant's behavior and compatibility with the property management's applicant criteria.
Components of Tenant Screening
The components of a tenant screening involve one or more of the following:
- Credit checks
- Criminal background checks
- Eviction history
- Employment verification
- Reference checks from previous landlords
Before accessing the above-mentioned information, the applicant must supply their personal information and deliver written consent permitting the execution of a rental background check.
Since federal and state laws govern how you can screen tenants and what information can or cannot be used, it's important to determine what type of screenings you can legally perform for your specific rental property.
Tenant Screening Fees
In order to obtain consumer information on a rental applicant, someone has to pay for that data. The question is - who?
Who Pays For Screenings
In most cases, the applicant pays for the screening. Sometimes, the landlord may have the applicant pay the screening agency directly, but in most cases, the prospective tenant first applies for the rental and pays an application fee that the landlord then uses to conduct the screening.
Typically, everybody over the age of 18 who will be on the lease will be screened, and each person will need to pay an application fee.
It's not uncommon for the landlord to charge a higher rate than the actual screening costs, largely because of the amount of work that goes into screening each applicant and the follow-up paperwork the landlord must complete after the screening results come in.
Average Cost of Rental Screenings
While most articles on this topic will state that application fees generally average around $50, this survey shows 89% of respondents (from 26 states) reported encountering application fees ranging from $25 - $350.
In another study, it was found that it is not uncommon for renters of color to pay higher application fees and higher security deposits.
Needless to say, it's not difficult to see why many states, cities, and even the federal government have started to consider imposing restrictions on application fees, security deposits, and other financial aspects of the leasing experience.
Indeed, many states and cities have not only considered it - some have already acted.
Legal Limitations On Screening Fees
In general, there are no federal restrictions on rental applications. However, some individual states do have restrictions on application fees:
- Maine – Landlords can only charge for the actual cost of the screening.
- Massachusetts – Application fees are not allowed.
- Minnesota – Any extra money beyond what is needed for screening should be refunded.
- New York – There is a $20 limit for application fees.
- Vermont – Application fees are not allowed.
- Washington – The application fee must equal the screening service cost exactly.
- Wisconsin – There is a $20 limit for application fees.
Without exploring the exhaustive specifics of each locality, it's important to note that local ordinances may impose additional restrictions on the amount landlords can request for rental application fees.
For instance, Eugene, OR, has a regulation that limits application fees to a maximum of $10. This is just one example of the nuanced regulations that can vary significantly from one municipality to another.
On TenantCloud, you have the ability to set the application fee amount that your prospective tenant pays. So, regardless of which state or city your rental is located in, you can make sure that your application fees adhere to the law.
Tenant Screening Services
When it comes to screening prospective tenants, using the right tool is essential. After all, we already discussed the dangers of using the wrong tool(s) for the job and the risks of using inaccurate or even outdated information - and we'll continue to cover that more in-depth in some of the sections below.
Some of the most prominent rental screening products on the market (that you've likely heard of) come from the credit bureaus themselves:
- Transunion: SmartMove
- Equifax: TotalVerify
- Experian: Experian Connect
And while each of these services has its strengths and weaknesses, they're each limited to the information that they have in their database. For anybody who has pulled their own credit check recently, you know that the information between the three bureaus often does not match up.
And then, to top that off, there are different credit scoring companies and models, too (we're up to what now, Fico 5000?).
This is why we have created our own powerful tenant screening service at TenantCloud that combines screening services and data from more than just one provider. It's specifically designed to ensure you get the most accurate and up-to-date information on your prospective tenants, including:
- Background, Criminal & Credit Screening Data
- Income Insights Information
- Detailed Local County Reports
Legal Considerations and Compliance
Before processing a rental application and using the information in the decision-making process of selecting a qualified tenant for your property, it's important to understand the legal ramifications and compliance requirements for doing so.
And these are not just applicable to major property management companies. Even if you're a small landlord with just a few rental properties, all the information below (and more) likely applies to you.
The Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) governs the collection, dissemination, and use of consumer information, including credit reporting. Landlords must adhere to FCRA guidelines, which mandate accurate data handling and provide individuals with the right to know what information is being collected and the ability to dispute any inaccuracies.
And, when you use consumer reports as a part of the tenant screening process, specific steps must be followed if the applicant is declined.
Fair Housing Laws
Fair housing laws at both the federal and state levels dictate that tenant screening must be conducted without discrimination. This includes prohibiting bias based on race, color, religion, national origin, sex, disability, and family status, among other protected classes.
The goal is to promote equal housing opportunities for all, and violating this law is often accompanied by financially painful penalties.
Geographic Tenant Screening Restrictions
Tenant screening laws in the United States can vary significantly from state to state, with each jurisdiction setting its own regulations regarding background and credit checks. Here are some examples of states with distinct requirements for tenant screening:
- California: California has strict laws about what can be included in a tenant screening report and how far back a background check can go. For instance, credit reports can only show information for the past seven years.
- New York: The state of New York, especially New York City, has implemented rules that cap application fees and restrict the use of criminal history for tenant screening.
- Massachusetts: The state of Massachusetts has limitations on what landlords can ask regarding criminal history, and they must adhere to strict guidelines when conducting credit checks.
- Washington: Washington state requires landlords to provide specific criteria they will use in the screening process before running a background or credit check.
- Illinois: In Chicago, the Residential Landlord Tenant Ordinance (RLTO) provides guidelines on what can be included in tenant screening and how that information can be used.
- Texas: Texas has specific regulations on how a landlord must handle credit information and the disclosures that must be provided to the tenant.
Landlords in these states must ensure they are compliant with both state laws and federal regulations, such as the Fair Credit Reporting Act (FCRA), which governs how consumer credit information is handled nationwide.
Source of Income Discrimination Laws
It's also important to be aware of additional laws that come into play when it comes to tenant screenings and what you're able to take into consideration when approving or declining a rental application. For example, some states, counties, and even cities have strict laws and ordinances against declining an applicant based on their source of income.
That includes income sources such as:
- Types of Jobs (e.g., adult entertainment, cannabis industry, gig economy, etc.)
- Child Support
- Alimony
- Government Assistance (e.g., Section 8 Housing Choice Vouchers)
- Social Security
That is just a sample, not an exhaustive list.
Adverse Action Notice Requirements
Under the Fair Housing Act and the Fair Credit Reporting Act, landlords are obligated to provide the prospective tenant with information if their application is rejected based on these reports.
They must disclose the use of any tenant screening services, the contact details of the reporting agency, and the applicant's entitlement to contest the report's accuracy. Additionally, applicants have a right to obtain a free copy of the report if they request it within 60 days of the denial.
The Risks of Inaccurate Screening Data
Incorrect or out-of-date details in a tenant screening or credit report can pose significant barriers to tenants' securing a place to live. Ensuring that the data on the report is accurate and relevant to the applicant applying for the rental property is incredibly important when screening renters.
Because of the importance of using accurate screening data, the hazards of using the wrong screening product are incredibly risky.
Ethical Considerations and Best Practices
In sectors of the real estate industry that deal with tenant screening, property management, and client interactions, it's crucial to operate within a framework of ethical and legal considerations, and to familiarize yourself with best practices. These principles not only protect your clients and business but also foster trust and credibility.
Let's dive into some key areas:
Avoiding Discrimination During Screening
Fairness in screening processes is not just a legal requirement; it's a cornerstone of ethical real estate practice. The Fair Housing Act outlines clear guidelines to prevent discrimination based on race, color, national origin, religion, sex, familial status, or disability. To adhere to these standards, real estate professionals should:
- Develop Consistent Criteria: Apply the same screening criteria to all applicants, such as credit checks, rental history, and income verification, to avoid any unconscious bias.
- Stay Informed and Educated: Regular training on fair housing laws ensures that you and your team are up-to-date on legal requirements and best practices.
- Document Everything: Keep detailed records of all interactions and decisions made during the screening process to provide transparency and accountability.
Handling Sensitive Information
Handling personal and financial information with utmost care is essential to maintaining trust. Here's how real estate professionals can respect privacy and manage sensitive data responsibly:
- Secure Storage and Disposal: Use secure, encrypted systems to store personal data and ensure that any disposal of records is done safely to protect against identity theft.
- Limit Access: Only staff who need to process personal information for their job should have access to it, minimizing the risk of misuse or accidental disclosure.
- Be Transparent: Clearly communicate to clients how their information will be used, stored, and protected, including any instances where it might be shared with third parties.
Conclusion
In summary, tenant screening is a key step for landlords to find good renters. This guide walked you through what's involved in screening, like checking backgrounds and making sure everything is done fairly and by the law. We also talked about how important it is to treat everyone's information carefully and to be clear about any money that needs to be paid for the screening, as well as the state and city limitations on application fees.
Doing tenant screening right means making sure you follow the rules, respect people's privacy, and are legally compliant in how you decide who rents your property.
And that makes the rental process much easier and transparent for both property managers and tenants alike!
