A landlord's guide to referencing tenants
Deciding on who you should rent your property to is an important decision and is one that should be made carefully. We have put together a handy guide for you to refer to when taking on new tenants.
1) Obtain ‘Offer’ Information
Before considering whether or not to proceed with new tenants it is important to get as much information as you can regarding the applicant's circumstances.
Always ask for confirmation of the rent and deposit they are offering or agreeing to, when they want to move in and how long they want the initial contract length to be. Make sure you have confirmation of exactly who would be living at the property, who would be responsible for paying the rent and how the rent would be paid.
Once you have agreed an offer you can move into the referencing process. Whether you instruct a referencing company directly or have this completed through your agency we strongly recommend it.
2) Pre Assessment
The following calculations will enable you to quickly assess whether or not a tenant or guarantor will meet the affordability requirements to pass an income assessment.
• Tenant - annual household income equal to or in excess of 2.5 times the annual rent
• Guarantor- annual household income equal to or in excess of 3 times the annual rent
Please note these calculations can vary between agency and referencing company so always double check with them
Prior to commencing with any checks it would be worth asking the applicant if they know of any reason why they may fail any aspect of tenant referencing such as known credit issues, affordability issues or a dispute with a previous/current landlord or letting agent. This should give you an idea of whether or not the applicant requires a guarantor and should hopefully avoid any nasty surprises with the results (see below for further information on guarantors).
3) Referencing Checks
We recommend reviewing the results of a recent credit check on your prospective tenant to check if they have any history of missed payments which has resulted in adverse credit. We also recommend obtaining references particularly from employers and the applicant’s current or former landlord/letting agent where possible.
When reviewing the results of the referencing you want to ensure that there has been a suitable estimate of household income - where this money comes from and whether or not it has been verified. Consider the following:
• If working full time – Is the position permanent? Has the income been verified either through a reference from an employer or payslips?
• If working part time – Consider the above, also do they have any additional income and have they provided evidence of this? Are they be entitled to housing benefit and do you accept this?
• If self-employed – How long have they been self-employed for? Has their income been verified through an accountant’s reference or a copy of a recent tax return?
• If retired – How much is their annual pension? Do they have any additional income and have they provided evidence of this? Are they be entitled to housing benefit and do you accept this?
• If unemployed – If the rent is to be paid by housing benefit does their entitlement cover the full rent and have they provided evidence of this? Do they have a cash deposit or will they be using a deposit bond from the council? Do they receive any additional income and have they provided evidence of this?
• If a student – Do they receive any Government funding and have they provided evidence of this?
• Rent in advance – Where is this money coming from and have they provided evidence of this? Also bear in mind how long they intend to stay for, how would they be funding the rent if they wish to start paying monthly?
Top tip- if in doubt do not be afraid to ask the applicant for further supporting documents such as payslips, bank statements etc.
In some circumstances a guarantor may be required, particularly if you are wanting to take out a rent guarantee insurance policy. As a general rule of thumb, students, anyone unemployed, and applicants who are self-employed for less than 1 year will all require guarantors. Also anyone whose household income does not meet the affordability criteria and anyone who may have past credit problems which may affect the results of their credit check.
It is important to note that although traditionally guarantors were accepted if they were homeowners, new referencing guidelines require guarantors to pass a credit check and an income assessment.
Once referencing is complete
Providing the checks have come back satisfactorily and both you and your prospective tenant/s are happy to proceed the next step would to proceed with the tenancy. Although it may be tempting to get the new tenants moved in as soon as possible it is important to ensure you are fully covered before granting possession of your property. Remember to obtain a copy of the tenant’s photo ID, ensure that either you or your managing agent have received both your one month’s rent in advance and your deposit and last but not least ensure that all tenancy documentation has been signed by all parties before you hand over the keys!
Article by Charlotte Dowey - Lettings Manager.