When you own an income property, you want to protect your investment. The last thing you want is to invite a tenant into your property to have them fail to pay rent month after month.
Unfortunately, there’s no guaranteed way to ensure that a tenant will pay their rent on time. There are, however, many things that you can do to decrease your risk. One of those things is running a credit check on potential tenants. Let’s talk a little more about how to do this.
Why Should You Run a Credit Check on Tenants?
Before we get into how to run a credit check, let’s talk about why you should run a credit check. Anytime you are inviting someone onto your property and are expecting them to pay rent, you’ll want to make sure that they have the ability to pay that rent.
Of course, the first thing you’ll want to do is make sure they have the income to pay rent. But once you have verified that, you’ll also want to verify that they are reliable.
One way to do this is by running a credit check. A credit check gives you a report of your credit history. Anytime you borrow money or apply for credit, your credit score will be affected.
Positive credit scores indicate that you are reliable in paying your monthly payments. Negative credit scores can indicate that monthly payments have been missed or that someone has a lot of unpaid credit (money owing).
Other things you can learn about someone’s credit history through a credit report include but are not limited to:
- Their identifying information and previous employers
- Any credit card accounts that they have open
- Any loans they have open
- How long accounts have been open
- Payment history on the cards
- Names of any co-signers on the cards
Credit reports will also tell you about any evictions or bankruptcies a person has been through, as well as any liens against them.
A low credit score, of course, does not definitively tell you whether or not a tenant will be reliable in paying rent. It does, however, give you a good glimpse of their payment history, and anyone with a low credit score may require further investigation.
How do you run a Credit Check on Tenants in Canada?
To run a tenant credit check here in Ontario or anywhere else in Canada, there are certain information you will need from the tenant or applicant. This will include their full legal name, their previous address, and their date of birth. You should also be prepared to request the name of the applicant’s current employer, current landlord, and social security number.
All of this information is entirely legal for a landlord to obtain. However, keep in mind that you must have an applicant’s permission and written signature before you can run a credit check on them. Running a credit check without permission is illegal in Canada.
To run a credit check, you can use any number of free credit checking agencies. One of the most common agencies used for this purpose in Canada is Equifax. All you have to do is visit their Canadian website, enter the identifying information of the tenant, and wait for results. Equifax has some of the quickest credit report results in the country, which is much of the reason why it’s such a popular option.
When you run a check with Equifax, you will get what is known as a Naborly Report. Within this report, you will be able to see the applicant/tenant’s credit report, as well as a detailed analysis of the risk involved in renting to them. Using the Naborly Report is highly recommended for all tenants who are not personally acquainted with their tenants.
Other Things to Note Before Running a Credit Report
- You will have to give your information too
Anytime you run a credit check of an applicant or potential tenant, the credit check company also has obligations.
Just as you have to do your diligence with a potential tenant, the credit check company has to do its diligence with the landlord. To allow you to run a credit check, the company or agency must first verify that you are, in fact, a landlord.
For this reason, you will have to provide them with the applicant’s information and your own. Credit check companies may request proof of current address, identification, and ownership over the property rental.
You can use documents such as insurance, mortgage statements, utility bills, or deeds to show that you are, indeed, the owner of a property.
It’s also important to note that it may take a few days for you to become approved as a landlord. Once you are approved, however, you can run as many checks as needed and results will be returned quickly.
- You have to decide whether or not to charge a fee
Some landlords like to charge a small fee for running a credit check. This is entirely legal to do and is entirely up to the landlord’s discretion. The main benefit of doing this is to deter those with poor credit from moving forward with their application.
If an applicant does have poor credit or is not serious about renting a property, a small credit check fee may be all it takes to deter them from wasting your time.
Landlords that do charge a fee usually keep it between $15-$20. You can also offer to deduct this fee from their first monthly payment if you choose to select them as a tenant.
Other Things to Check Before Accepting a Tenant
While a credit check can be a great way to verify a potential tenant’s reliability, it’s not the only way. In addition to doing a credit check, a landlord can also request other documents:
- Ask an applicant for references (either personal and/or from previous landlords)
- Verify their place of employment with their employer
- Ask for a criminal background check
- Ask for bank statements to verify that they can afford the monthly payments
If the credit check comes back clean, references give positive reviews, a background check is passed, and the applicant has a monthly income that can cover rent, then you can probably rest assured that they will be reliable in paying their monthly rent on time.
You’ll also want to acquaint yourself before signing any leases to ensure that the tenant will be compatible with your lifestyle and expectations.