For every landlord, referencing is an important part of signing up a new tenant for a rental property. At its most basic level, tenant referencing is about making sure that your new tenant has the means to pay their rent each month and that they are likely to be responsible and take care of your property.
But what if the applicant, who seems like a good tenant, fails a credit check – should you rule them out, carry on regardless or is there anything else you can do?
If you own property in areas where there is a high rental demand, you have the luxury of being more selective with your criteria for accepting tenants.
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Areas such as Canada Water and Shad Thames provide quick links into central London, with more affordable rent than places like Canary Wharf. As a landlord in these areas, you have the opportunity to be more comprehensive with tenant vetting processes.
Tenant referencing is the process of conducting background and credit checks on potential tenants to minimise the risk of letting your property to someone who will cause problems later on.
You can carry out most of these checks yourself or ask your letting agent or a referencing company to do them for you. Find out more about how to choose a tenant in our blog article.
The main referencing checks you should be doing are:
Landlords in England are legally obliged to check the immigration status of all adults occupying the property before they rent it out. The requirements include checking ID and relevant documents such as passport, citizenship certificate or original immigration documents. Landlords can complete the checks themselves or use a letting agent to conduct the checks on their behalf.
There is also an option to use an online identity service provider (IDSP) or certain tenants will be able to provide a share code, which enables a landlord to check their documents online.
These involve checking tenants’ bank statements, payslips, proof of earnings – or tax returns if self-employed – to make sure they have enough money to afford the rent. The figure often quoted is that the tenant should earn 30 x their monthly rent to be able to comfortably cover it.
Landlords can request a reference from the tenant’s employer, which should be an email from a legitimate business email address or a call to a HR department or the tenant’s manager. The employer should be able to confirm the tenant’s salary.
If the tenant has rented property before, they should also be able to provide contact details of their previous landlord, so they can be contacted to provide a reference.
Some tenants may not be able to provide employer or previous landlord references. If the tenants are students, the landlord could ask the tenant to provide a reference from their tutor at their college or university.
It is also a good idea to find out about the tenant’s credit history and credit score – whether they have had debts, missed payments or had county court judgements against them. You can do this with a credit check by a credit referencing company such as Experian or Equifax. You will need to get the tenant’s permission first.
Want to be a more informed landlord? It helps to know how long tenant referencing takes and the wider process of how to choose a tenant before you list your property.
Common reasons why tenants fail the referencing process range from worrying red flags to issues you may be able to resolve. For example, you could potentially require a guarantor if your young tenant lacks a substantial credit history.
Here are some of the factors that lead tenants to fail referencing:
Using the tenant’s personal details, the credit referencing agency will run an automated check that will bring up the tenants’ credit history and create a report.
As we’ve said, landlords need to know that a prospective tenant will have the means to pay the rent each month and that they don’t have a history of debt or financial mismanagement. They also need to know that a tenant has behaved well during a previous tenancy. In addition, carrying out proper checks may be a condition of your buy-to-let mortgage or landlord insurance package.
How long the referencing process takes will depend upon the level of checks you’re carrying out and whether you are doing them yourself, using letting agents or using a professional referencing company. While the results of a credit check can be instant, taking up references and carrying out background checks may take longer. Most referencing companies should get a report to you within two days.
If someone fails a reference check it doesn’t necessarily mean they will be a bad tenant, but it should ring alarm bells. You should be careful to check the terms of your mortgage and insurance as you may not be able to accept a tenant who has failed a reference check. This is generally the case if you wish to take out insurance to cover you for loss of rent if the tenant defaults.
If the tenant failed referencing checks, your options are to reject the tenant; find out more about their situation or request a guarantor. If you choose to delve into the reasons for the failed check, you may find it is down to a single missed payment, when otherwise the tenant’s credit history has been good or that they have a large amount of savings to cover them in difficult periods.
You may, however, decide to ask for a guarantor – someone who agrees to step in and cover the rent if the tenant defaults. The guarantor would need to co-sign the tenancy agreement. This type of arrangement is common when renting to students or other young people without a strong credit or employment history.
There’s sometimes no option but to reject a tenant if they fail the referencing process. If they have failed a right to rent check, they cannot legally rent in the UK – and you must also reject tenants who will invalidate your buy-to-let mortgage terms.
Strong vetting should include checking your tenant’s right to rent, and you may also want to consider whether rent guarantee insurance is worth it as extra protection.
If a tenant is unable to get a guarantor, there are still a few options that will provide you with some security against the risk. For example, you could request a larger rent advance that will cover a few months of missed payments. There are also guarantor companies that can act as guarantors rather than somebody the tenant knows.
The guarantor should also be able to show that they have the means to cover the rent if the tenant can’t, so an additional credit check will be needed.
The same issues apply to a guarantor as the tenant – if they fail a credit check this could invalidate your insurance as well as indicating that they may not be able to step in if your tenant defaults. At this stage it is probably best to find another tenant.
Rent guarantee insurance may be an option but some providers will not provide cover for tenants they deem to be high-risk, such as ones with adverse credit history. The insurers also sometimes apply deferral periods, so if the tenant misses a payment in the first month, this may not be covered.
The referencing process is not being directly overhauled under the Renters Rights Bill, but landlords must be mindful of new discrimination rules when they advertise and accept or reject tenants.
Currently, tenants who receive benefits and tenants with children can be ‘referenced out’, however, this will not be permitted except on overcrowding or affordability grounds. Similarly, advertising the property as ‘no DSS’ will be banned.
This new law would override BTL mortgage terms or lease clauses to the contrary, with new insurance contracts set to follow.
If you are a new landlord, we can advise you further about finding the right tenant in Bermondsey or London Bridge – when it comes to reference checks and any other issues. To find out more about the services we offer landlords contact us today.
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