Creating Acceptance Criteria to Tenant Screen Like the Pro’s
This is the last installment of our 3-part blog series to help you screen like the pros, and here we will learn how to create excellent tenant screening acceptance criteria.
As a quick refresher, this 3-part blog series is designed to help build your confidence and enhance your screening strategies. Our goal is to help you:
- Build confidence and perspective by understanding high-level, national screening metrics — Part 1
- Create a foundation of strong screening processes that the professional use in their vetting processes — Part 2
- Develop great screening standards (aka “screening acceptance criteria”) — Part 3
How to Develop Excellent Acceptance Criteria
Creating excellent acceptance criteria is an ongoing effort as markets, macro-economic factors, and property conditions change. But it doesn’t have to be paralyzing or even time-consuming.
To start, let’s evaluate each of the three major background components that we can build acceptance criteria on:
- Evictions & Other Public Record Data
# of Years' Screening Experience We Use as a Base for these Tips
The major decision regarding credit is whether you rely more heavily on:
- The credit score, or
- The credit report data
Generally speaking, users will choose to rely primarily on one of these two factors — either scores, or detailed credit data in the full credit report.
Books have been written on credit scores. There are hundreds, if not thousands, of different scores for different uses cases, different score algorithms, versions of algorithms, and so on. You may have noticed that when you see your own credit scores, they can be quite different from what a lender might tell you — because it’s a different scoring algorithm depending on the purpose, potential lender, bureau, inquiry date, etc.
Scores have their benefits — namely, it is relatively easy to compare applicants with scores. Generally speaking, an applicant with a higher credit score is a lower risk than an applicant with a lower score. And again using broad strokes, many will consider a score over 650 as relatively low risk and a credit score under 550 to be high risk.
Major Differences in the Bureaus?
Credit bureau data is now quite similar among the 3 major bureaus: Experian, Equifax, and TransUnion. Long ago, it was common for one bureau to have more data in a region of the country than the others. Now, data among the bureaus is fairly similar and they try to differentiate on their proprietary scores and other behavioral-driven insights.
“Why is my credit score that I got from a bureau different than what the auto lender told me it is?”
Credit Report Data:
By contrast, the data in the credit report is stoic data and won’t change that much depending on the bureau being used or other factors:
- Tradelines: Who the debtor has established credit with, type of debt (auto, credit card etc), date accounts were opened, credit/loan limits, balances, and repayment history
- Credit Inquiries: List of everyone who has accessed the credit report in the last two years
- Public Records & Collections: Public record information pulled from courthouses that contain data types such as bankruptcies, foreclosures, suits, wage garnishments, liens and judgments
We can make several charts including how much debt is outstanding, how many credit/loan sources exist and so forth. We can also choose to exclude bankruptcies, ignore medical and/or student debt and so on.
Which is better?
There is no empirical standard, with one way being better than the other. It depends on your ability to read reports, how much traffic you get, and so on. Personally, I like to dive into the credit report data myself and base acceptance criteria off the tradeline data. But for many, the score does just as good a job.
A Good Rule of Thumb
For most, the score is probably the best route. Diving into the details of the credit data to evaluate applicants is a more thorough approach, but ill-advised unless you are very familiar with credit data, your applicant traffic, and ability to establish compliant processes.
We can best categorize criminal activity into two buckets: misdemeanors and felonies. There are several other ways to analyze criminal data more deeply using additional categories and dispositions, but unless you’re an expert, let’s stick to the basics that will work well for all of us.
A simple and effective way to evaluate criminal is to create criteria similar to the chart to the right.
It’s critical to note 2 key areas of importance:
- Only use criminal data with convictions. Using arrest data is never appropriate as it can lead to “disparate impact”, which is essentially unintended discrimination. Nearly all background service providers only distribute conviction data to protect you and themselves from major lawsuit
- The Department of Housing & Urban Development (HUD) very recently issued new guidance in April 2016 that to deny applicants with a criminal record in blanket form could be discrimination. The landlord should consider the nature of the crime, when it occurred, and the behavior that has since transpired
HUD issued new guidance on April 4, 2016 which advises landlords to consider the nature of an applicant’s criminal history and whether it poses a housing risk. Take into account the time that has lapsed, the nature of the crime, and the behavior since to determine if the applicant is a housing risk.
Evictions and other Public Record Data
Interestingly, evictions is the one category that seems to be the most universal in application. Credit and criminal can vary quite a bit across property types. For example, if a large property management company has various types of properties in various parts of the country:
- Credit: Will vary from Class A properties to Class B or Class C
- Criminal: Will vary in allowing various levels of misdemeanors, felonies across varying time frames
- Eviction: Tends to not vary that much. Universally, no property owner or manager wants to willingly accept prospects that have not paid their current or former landlords in full
The only major distinction in eviction records is whether a record is an initial filing or a judgment:
- Initial Filing: A filing made by a landlord — it may or may not run through the full court process to a judgment. A common reason might be that once the landlord files, the tenant pays the rent, and then the landlord drops the filing
- Eviction Judgment: This has gone through the full court process. A judgment for a tenant to pay someone indicates the court found the tenant to be remiss in payment
A property in a great area, in a great market, might not accept any applicants with initial filings or judgments in the last 7 years. A property in a moderate area or a in a moderate market might accept applicants with 2 initial filings in the last 3 years and 0 judgments in the last 3 years; conditional acceptance at this property might be 1 judgment in the last 5 years.
Other Public Record Data:
Generally this means bankruptcies, liens, and judgments — these are all a matter of public record. Creditors typically acquire property liens through your voluntary consent. On the other hand, creditors obtain judgment liens as a result of a lawsuit against you for a debt that you owe. Until the 2007-2010 recession, these items were pretty rare for a tenant screen.
Treat these similar to the other categories – create a matrix for acceptance criteria as to whether you will accept, conditionally accept, or decline applicants with these items in their backgrounds. Determine how far back you will go between now and 7 years, which is the general reportable life of a public record.
After reading this 3-part blog, our intention is that you now have the knowledge to screen like the pros. You can implement best practices, create excellent screening criteria, and benchmark your metrics against the pros. Use this knowledge to be confident and grow your success and portfolio!
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