Many landlords don't realize that they can quickly and easily review the Credit History of prospective renters by ordering credit reports (and criminal background checks) online. When a property manager orders a credit report at www.Landlord2landlord.com, the report includes an overall credit score based on the information in the report. That score is calculated by a mathematical equation that evaluates many types of information that is within the credit report. By comparing this information to the patterns in hundreds of thousands of past credit reports, the resulting score identifies the applicant's level of future credit risk.
About FICO Scores
Credit Bureau scores are often called "FICO scores" because most credit bureau scores used in the United States are produced from software developed by Fair, Isaac and Company. FICO scores are provided to lenders by the three major credit reporting agencies; Equifax, Experian, and TransUnion. For a FICO score to be included on an individual's credit report, the report must contain at least one account that has been open for six months or longer. In addition, the report must contain at least one account that has been updated in the past six months. This ensures that there is enough recent credit history information to create the score.
FICO scores provide the best guide to determine future risk when the decision is based solely on credit report information. The higher the score - the lower the risk. However, no score says whether an individual will be a "good" or "bad" customer. While many landlords use FICO scores to help them make leasing decisions, each landlord has their own strategy, including the level of risk that they find acceptable. There is no single "cutoff" score used by all lenders and landlords, as there are many additional factors that lenders use to determine lending decisions. A FICO score changes over time. As your information changes at the credit-reporting agency, so will any new score based on your credit report. So a FICO score from a month ago is probably not going to be the same score a lender or landlord would get from the credit-reporting agency today.
Most landlords that rely on scoring from online tenant screeners say they are more concerned about renting to an individual when their FICO credit score is below 600. However, the credit report score alone is hard to rely on especially when renting lower end properties or during hard economic times. You will serve your property investment business better by being more concerned about a renter's employment longevity, credit defaults and total monthly obligations as a percent of the applicant's total income.
Most lenders use a factor of 45% of total monthly obligations vs. total income as a good balance. Lenders use 45% as a baseline because they want the loan recipient to have 55% of their total income to buy groceries, insurance, and cover all the other expenses of living. The 55% factor should include their monthly rent to you and all other monthly expenditures such as credit cards, store charges, cars, and other monthly expenses.
Interpreting Your FICO Score
When a lender or landlord receives a Fair, Isaac credit bureau risk score within a credit report, up to four score reason codes are delivered with it. These codes explain the top reasons why an individual's FICO score was not higher. These score reasons can help the landlord understand why a rental applicant's score was not higher.
These score reasons are more useful than the overall FICO score in helping you determine whether an applicant's credit report might contain errors, and how the individual might improve their score over time. If the applicant already has a high score (for example, in the mid 700 range or higher) some of the score reasons may not be very helpful. They may be marginal factors related to the length of credit history, new credit and types of credit in use.
Top 10 Score Reasons
Here are the top 10 most frequently given score reasons. The specific wording given by a lender may be different from the ones listed.
- Serious delinquency.
- Serious delinquency, and public record or collection filed.
- Derogatory public record or collection filed.
- Time since delinquency is too recent or unknown.
- Level of delinquency on accounts.
- Number of accounts with delinquency.
- Amount owed on accounts.
- Too many accounts with balances.
- Length of time accounts has been established.
- Proportion of balances to credit limits on revolving accounts is too high.
Other Names for FICO Scores
Each of the three credit reporting agencies has different names for FICO scores. All of these scores were developed using the same methods by Fair, Isaac and have been tested to ensure they provide the most accurate picture of credit risk possible using credit report information. Equifax calls it a Beacon score, Experian calls it a Fair Isaac Risk Model and TransUnion has labeled it as Empirica.
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