Investors need a keen eye and refined ability to strategize and interpret data accurately to leverage today’s plethora of credit information effectively and leg
Real estate has
always been about credit, even before Congress created Fannie Mae and
Freddie Mac in 1938 and the wheels were set in motion to create today’s
extremely credit-dependent home-lending environment. Investors need a keen eye and refined ability to strategize
and interpret data accurately to leverage today’s plethora of credit
information effectively and legally in their real estate business.
To explore recent changes in credit
scoring and credit-data management technology.
How does credit scoring really work right now, in 2018? Shared Report
According to Mr Tyler, S. Equifax Inc - Consumer Credit Reporting Agency:
Specifically in a tenant-screening situation, [a credit bureau] is
tasked with providing credit reports, often at the request of a
third-party such as a tenant-screening service, which manages the full
application process from front to end. This includes everything from
obtaining verification of income, verification of employment, to any
other key areas that the rental owner requires that fall within the
legal range of privacy laws and local regulations. Additionally, this
will also likely include some form of background check as part of the
process as well. The service then aggregates all this information and,
either on its own or in conjunction with the landlord, uses it to make a
well-informed decision that serves the best interest of the business
and community, along with any other goals they have for their
Typically, that process looks more or less like this:
- Get the credit score
- Determine if the applicant is employed and verify their income
- Confirm that the applicant is earning roughly three times the value of their monthly rent
- Identify past evictions and criminal behavior
- Make a decision
TRM: Lately, there have been some big
changes to the industry that prohibit some pieces of that process. Some
landlords now operate in areas where the background check and even
information about non-payment of certain taxes cannot be part of the
screening process. What does that do to the credit side of things?
TS: The thing every investor (and
lender, for that matter) must realize is when you remove components from
a particular score, that score will change and be less comprehensive.
In some cases, especially when an individual has very little credit
history or their history is not stellar, the removal of that information
can hurt. Remember, this exclusion affects everyone, including the
people who did pay their property taxes, for example, because that
information is now eliminated from the system. When there is not enough
data associated with a credit history, the end result is that the person
who requested the information, the landlord or lender, is going to be
taking on more risk and will likely require a higher deposit, a
co-signer, or reject the application outright. This is a problem because
it makes it more challenging on both sides of the equation to get the
lease papers signed and place a tenant.
TRM: Are there any other sources of information out there to help fill in those gaps?
TS: Yes. If your goal is
to really fill the gap and put people in homes, you have to be really
laser-focused on what happens when an individual has either thin credit
or no credit. For example, you might evaluate past rental payment
information, whether the individual pays their utilities and
telecommunications bills on time. Knowing that they prioritized their
last housing bill, for example, is good to know if you are considering
renting to them!
TRM: Where should investors look for this information?
TS: A lot of it can be
found in the public record, or you can look to sources of data that
might not previously have been on your radar when you did a credit
check. As the credit-scoring environment and industry continue to
evolve, you want to leverage new types of information for no-credit and
low-credit populations to increase the size of your population of viable