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. As far back as the 9th century, lords of the manor on feudal estates documented rents collected (and associated timeliness) from residents. Of course, the evaluation process for tenants and borrowers has evolved dramatically since feudal times. More recently, thanks to technological advances and social and cultural evolution, the concepts of credit and creditworthiness in 2018 are far different than they were just two decades ago. 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.
Think Realty Magazine sat down with Tyler Sawyer, Vice President of rental, real estate & property data and analytics at Equifax, to explore recent changes in credit scoring and credit-data management technology.
Think Realty Magazine: Okay, pull back the curtain! How does credit scoring really work right now, in 2018?
Tyler Sawyer: 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 prospective tenants.
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 residents.
Tyler Sawyer is the vice president of rental, real estate & property data and analytics at Equifax Inc., a consumer credit reporting agency that collects and aggregates data on more than 800 million individual consumers and 88 million businesses worldwide. Learn more about alternate data sources and credit scoring at Equifax.com or email wyatt.jefferies@equifax.com.
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