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What Landlords Should Know About Hard and Soft Credit Checks

In another article, we tackled the importance of credit checks when vetting possible tenants. The information included in the process was discussed like past addresses and bank account history. These records can indicate a renter's capability to meet the payment terms of a lease in a timely and consistent manner.


Today, the focus will be on the two types of credit checks – hard and soft inquiries. Outlined below are their common attributes as well as key differences.


Only hard inquiries impact credit score


There may be potential tenants who are hesitant to provide permission for a credit check. That's because they might have the notion that it will impact their credit score. It's vital to dispel any doubts a possible tenant may have by explaining the difference between hard and soft inquiries.


A hard inquiry affects credit score because it's directly associated with a credit application, like a loan or credit card. It's different from a soft inquiry or soft pull, which is more of a general request for information about a person's credit history. A report on how landlords use credit checks mentions that payment due dates and income-to-debt ratio are some of the details considered for rental agreements. These may already be shown in the results of a soft inquiry, which is why a tenant screening is tagged under this type of credit check.


Tenant screening is classed as a soft pull


Given the relationship above, tenant screenings are classed as soft pulls because the application involved is not a kind of credit. In simple terms, the provider or supplier – in this case, yourself as a landlord – is not lending money. The offer on the table is tenancy. The accomplished rental application points to it as the object of interest, as opposed to a financial product.



Soft inquiries may occur without permission


For the same reasons, soft pulls may occur without the permission of the individual subject to the report, unlike hard inquiries. This is common practice among credit lending institutions and insurance firms in assessing pre-qualified clients who may be eligible for special offers. Companies rely on the data to determine the best strategy for acquiring more accounts. In a similar manner, prospective tenants may be considered pre-qualified when the landlord accepts the application. The credit check is also the tool used for the evaluation.


The only difference is that it's best practice for landlords to get consent before doing a credit check. Even if landlords are only allowed to do soft pulls, asking permission is still essential to ensure compliance with the Fair Credit Reporting Act (FCRA). A guide to hard versus soft credit checks details that written consent is necessary to safeguard the rights of both consumer and provider. It may be requested during the application process. For landlords, you may include a clause covering this agreement in your application form. Alternatively, a separate document can be signed by the potential tenant confirming that a credit check may be conducted.



Consider processing costs


Credit checks, whether hard or soft, require processing fees and other costs. The prices on a personal credit report differ depending on the credit bureau. Requesting a credit report for a business is another matter, as it may cost $45.95 or more. This is due to the scope of a business credit check, which has its own set of considerations. These include legal status, principal credit references, banking information, and international activity if the company operates in several countries. You may need to take this higher cost into account if your rental property is commercial.


The good news is there are strategies to offset the expenses. For starters, it's acceptable to charge an application fee to potential renters. You may also make a deal with the tenant about covering the fee, and if they go through with the lease, the amount will be deducted from the first rent payment. A third option is to only do credit inquiries on prospective tenants who made a deposit.


Now that you know more about hard and soft credit checks, you can make better decisions as a landlord and ultimately protect yourself from unnecessary risks. Combine this knowledge with support from experienced tenant screening professionals to help maximize the earning potential of your property.



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