Medical Debt & Tenant Screening: A Landlord’s Guide

As a landlord, tenant screening is a critical part of your business. You want to ensure that you’re renting to reliable tenants who will meet their rent obligations and take care of your property. Credit reports are a key tool in this process, but they can be confusing, especially when it comes to medical debt. For the wider workflow this fits into, see our tenant screening guide for new landlords. Here’s what you need to know.

Understanding Medical Debt on Credit Reports

Medical debt is a common issue in the United States. According to a 2023 study by the Kaiser Family Foundation, roughly 1 in 5 adults under age 65 have past-due medical debt. This type of debt can appear on a tenant’s credit report, but it’s important to understand how it differs from other types of debt.

Medical debt can arise from various sources, including hospital bills, doctor visits, surgeries, or prescription medications. Unlike other types of debt, medical debt is often unpredictable and can be caused by emergencies or unexpected illnesses. This means that a tenant with medical debt may not necessarily be irresponsible with their finances.

For example, consider a tenant who has a stable job and a good payment record but had an unexpected medical emergency that resulted in significant debt. In this case, the medical debt may not be indicative of the tenant’s overall financial responsibility.

The Impact of Medical Debt on Credit Scores

In 2014, the three major credit bureaus (Equifax, Experian, and TransUnion) announced changes to how medical debt is reported. These changes included a 180-day waiting period before medical debt could appear on a credit report, removing medical collections under $100 from reports, and removing medical collections that were paid by insurance.

These changes were aimed at reducing the negative impact of medical debt on credit scores. However, medical debt can still affect a tenant’s credit score, especially if it is significant or has been in collections for an extended period. As a landlord, it’s important to consider the context of medical debt when reviewing a tenant’s credit report.

For instance, if a tenant has a high amount of medical debt that has been in collections for several years, it may indicate financial instability. On the other hand, if the medical debt is relatively small and has been paid off, it may not be a cause for concern.

Evaluating Medical Debt in Tenant Screening

When evaluating a tenant’s credit report, it’s crucial to look at the bigger picture. Here are some factors to consider:

• Amount of debt: A small amount of medical debt may not be a cause for concern, especially if it has been paid or is being actively managed.
• Age of debt: Older medical debt that has been resolved may have less impact on a tenant’s creditworthiness than recent, unpaid debt.
• Other factors: Consider the tenant’s income, employment history, rental history, and references. A tenant with medical debt but a strong overall profile may be a better fit than an applicant without medical debt but weaker qualifications.

For example, if a tenant has $500 in medical debt that was incurred last year but has since been paid off, it may not be a significant red flag. However, if the tenant has $10,000 in unpaid medical debt that has been in collections for several years, it may indicate financial instability.

Red Flags to Watch For

While medical debt should not be an automatic disqualifier, there are certain red flags to watch for when evaluating a tenant’s credit report. It also helps to know how medical entries compare to other collections accounts on rental applications so you can weigh each one in context. These include:

• Multiple medical debts: If a tenant has multiple medical debts, it may indicate a pattern of financial instability.
• Recent medical debts: Recent medical debts that have not been paid off may indicate ongoing financial issues.
• High amounts of debt: High amounts of medical debt, especially if they have been in collections for an extended period, may indicate significant financial instability.

For instance, if a tenant has three separate medical debts totaling $20,000 that have been in collections for the past two years, it may be a cause for concern. On the other hand, if a tenant has one small medical debt that was incurred last year and has since been paid off, it may not be a significant red flag.

A Step-by-Step Screening Checklist

To ensure a thorough and fair tenant screening process, follow this step-by-step checklist:

1. Review the credit report: Carefully review the tenant’s credit report, paying special attention to any medical debt.
2. Consider the context: Understand the circumstances surrounding the medical debt. Was it caused by an emergency or unexpected illness? Has the tenant taken steps to resolve the debt?
3. Evaluate other factors: Consider the tenant’s income, employment history, rental history, and references.
4. Communicate with the applicant: If you have concerns about medical debt on a tenant’s credit report, it may be helpful to discuss the issue with them directly.
5. Make an informed decision: Based on your evaluation, make an informed decision about whether to approve or reject the tenant application.

For example, if a tenant has a stable job and a good payment record but has $500 in medical debt that was incurred last year and has since been paid off, you may decide to approve their application. However, if the tenant has $10,000 in unpaid medical debt that has been in collections for several years, you may decide to reject their application.

Common Mistakes First-Time Landlords Make

First-time landlords may make several common mistakes when evaluating medical debt on a tenant’s credit report. These include:

• Automatically disqualifying applicants: Medical debt should not be an automatic disqualifier. Consider the context and other factors in the tenant’s application.
• Ignoring paid medical debt: Paid medical debt should not negatively impact a tenant’s credit score. Make sure to verify that any medical debt on the report has not been paid or resolved.
• Focusing solely on credit scores: Credit scores are just one part of the picture. Consider other factors, such as income, employment history, and rental history, when evaluating a tenant’s application.
• Not communicating with the applicant: If you have concerns about medical debt on a tenant’s credit report, it may be helpful to discuss the issue with them directly. They can provide context and explain their situation.

For instance, if a landlord automatically disqualifies an applicant with any amount of medical debt, they may miss out on a reliable tenant who had an unexpected medical emergency. Similarly, if a landlord ignores paid medical debt or focuses solely on credit scores, they may make an uninformed decision about the tenant’s application.

Questions to Ask Previous Landlords

As part of your tenant screening process, it’s important to communicate with previous landlords. Here are some questions you can ask:

• Did the tenant meet their rent obligations on time?
• How was the tenant’s communication regarding maintenance issues?
• Did the tenant take care of the property?
• Would you rent to this tenant again?

These questions can provide valuable insights into the tenant’s reliability and responsibility. For example, if a previous landlord reports that the tenant always met their rent obligations on time and took good care of the property, it may indicate that they would be a responsible tenant despite any medical debt on their credit report.

Best Practices for Landlords

To effectively evaluate medical debt in tenant screening, follow these best practices:

• Review the entire credit report: Look at all aspects of the tenant’s credit report, not just their score. Pay attention to any medical debt and its status (paid or unpaid).
• Consider the context: Understand the circumstances surrounding the medical debt. Was it caused by an emergency or unexpected illness? Has the tenant taken steps to resolve the debt?
• Communicate with the applicant: If you have concerns about medical debt on a tenant’s credit report, it may be helpful to discuss the issue with them directly. They can provide context and explain their situation.
• Use a comprehensive screening process: Credit reports are just one tool in tenant screening. Consider using additional resources, such as rental history reports and background checks, to get a complete picture of the applicant.

For example, if a tenant has a stable job and a good payment record but has $500 in medical debt that was incurred last year and has since been paid off, you may decide to approve their application. However, if the tenant has $10,000 in unpaid medical debt that has been in collections for several years, you may decide to reject their application.

Organizing Tenant Records with TenantFlow

As a landlord, it’s essential to keep detailed records of all your tenants. TenantFlow is a property management software designed specifically for independent landlords, helping you organize lease documents, tenant information, maintenance requests, and more. Here’s how TenantFlow can help you manage your properties more efficiently:

• Lease lifecycle management: TenantFlow allows you to draft, e-sign, and store leases electronically. This ensures that all your lease documents are organized and easily accessible.
• Tenant records: With TenantFlow, you can maintain comprehensive tenant profiles, including contact information, lease history, emergency contacts, and document attachments. This makes it easy to keep track of all your tenants’ information in one place.
• Maintenance request tracking: TenantFlow helps you track maintenance requests, from submission to completion. You can assign vendors, monitor status, and document photos and timestamps.
• Document vault: The software’s global search feature allows you to quickly find leases, tenant documents, inspections, and maintenance records. You can also create custom categories to organize documents per owner.
• Inspections: TenantFlow enables you to record move-in, move-out, and periodic inspections with photo evidence. This helps you document the condition of your properties over time.

For instance, if a tenant reports a maintenance issue, you can use TenantFlow to track the request from submission to completion. You can assign a vendor, monitor the status of the repair, and document photos and timestamps to ensure that the issue is resolved promptly.

Financial Reporting and Tax Preparation

In addition to organizing tenant records, TenantFlow offers financial reporting features that can help you manage your rental income and expenses. The software provides an income/expense ledger with category tagging, making it easy to track your financials throughout the year. You can also generate tax-ready exports, such as year-end summaries, 1099 forms, financial statements, income statements, and cash flow reports.

By using TenantFlow to organize your tenant records and financial data, you can streamline your landlord operations and ensure that you have all the information you need to make informed decisions about tenant applications. For example, if you need to prepare your taxes at the end of the year, TenantFlow’s tax-ready exports can help you quickly and easily generate the necessary documents.

Free Resources for Landlords

TenantFlow offers several free resources to help landlords manage their properties more effectively. These resources include:

• Seasonal maintenance checklist: A printable HVAC/plumbing/electrical/exterior inspection list, organized by quarter. This checklist can help you stay on top of seasonal maintenance tasks and keep your properties in good condition.
• Landlord tax deduction tracker: A spreadsheet keyed to IRS schedules with auto-totaled categories. This tool can help you track your deductible expenses and simplify your tax preparation process.
• Security deposit reference card: A one-page summary of deposit limits, return deadlines, and required documentation per state. This reference card can help you ensure that you are following the laws in your state regarding security deposits.

For example, if you need to inspect a property before the winter season, TenantFlow’s seasonal maintenance checklist can help you stay organized and ensure that all necessary tasks are completed. Similarly, if you need to prepare your taxes, the landlord tax deduction tracker can help you keep track of your deductible expenses.