Any landlord will tell you that months of hard work will go into renting out a property. And after months of chasing solicitors and mortgage advisors to get the sale through, as well as the work that goes into bringing the property up to code and marketing it to prospective tenants, it can be very tempting to move a new tenant in as soon as possible so that you can start financially benefiting from the fruits of your labour.
But before signing the contracts, it might be a good idea to carry out a tenant reference to ensure you’re protecting your investment. After all, once a tenant has moved into a property it can sometimes be difficult to evict them.
With this in mind, we’ve pulled together a Landlord Tenant Referencing Guide to help you understand the benefits of obtaining a tenant reference before renting out your property.
Why is it a good idea to carry out a tenant reference?
As above, it can be difficult to evict tenants once they’ve living at the property, with new laws being written every year to protect the rights of tenants against unwarranted or ‘revenge’ evictions. While this is clearly a good thing for tenants and ‘generation rent,’ unfortunately this also means that, should a tenant fall into rental arrears or breach their tenancy agreement, it can take a few months for a landlord to gain repossession of their property – especially if the tenant chooses not to leave once the eviction notice period has ended, sometimes resulting in the case going to court.
Obtaining a tenant reference might give you peace of mind that your tenant can afford to pay their rent, as a tenant reference will be able to confirm their credit history, as well as their affordability. Although there are always unforeseen circumstances that could still result in an eviction (if the tenant were to lose their job, for example), validating their income before the tenancy begins could give you a rough idea of whether they’re likely to fall into rental arrears.
It’s important to bear in mind that undertaking a tenant reference does not negate the need to carry out a ‘right to rent’ check on your tenant at the start of each tenancy. Since 01 February 2016, it’s been a legal requirement to carry out checks on your tenant prior to the start of a tenancy confirming their right to rent in the UK. Failure to carry out these checks could result in a fine of up to £3,000 per illegal occupant – so it’s definitely worth making sure you’re fulfilling your legal requirements.
Some credit referencing agencies will offer a ‘right to rent’ service, but not always – so make sure you’re clear on whether you need to perform these checks before the start of the tenancy. To find out more about your responsibilities when it comes to checking a tenants’ right to rent, please visit the government website.
What will a tenant reference tell me about a tenant?
There are various tenant referencing providers across the UK, who will use a separate credit reporting agency to carry out the financial checks. The three most common credit reporting agencies you’ll come across in the UK are Callcredit, Equifax and Experian, as they hold the largest amounts of data and so can carry out the most accurate checks.
It’s important to note that if your tenant has never lived in the UK before and has no prior UK addresses, then a credit reporting agency may struggle to make a decision on the tenant, as they will have no credit data to draw upon for the reference. However, if the agency is able to verify the tenants’ income, then they may still be able to ‘pass’ the reference – however, this will be up to the agency’s discretion.
Dependent on the level of tenant reference you choose (and the referencing provider), a reference will verify some, or all, of the following:
- Credit score
- Whether the tenant is on the electoral roll
- Bankruptcy history
- Income validation and employer reference
- Previous landlord reference
- Affordability (usually a tenant needs to earn around 2.5x the rental amount to pass the affordability checks, but again, this will be dependent on the provider.)
- Whether the tenant has any outstanding County Court Judgements or Individual Voluntary Arrangements
There are two main types of tenant reference you’ll come across - an instant report (or basic reference) and a comprehensive reference.
An instant report will carry out a very basic credit check on your tenant, however it will not validate their income with their employer. This means that an instant report relies fully on the information provided by the tenant on the referencing application form being fully accurate. If you’re carrying out an instant reference on your tenant, then you may want to carry out your own additional checks to verify their income, just in case.
A comprehensive reference goes a step further than the instant report. As well as a credit check, the reporting agency will speak to the tenants’ employer and previous landlord to ensure they’re able to afford the rental amount and have a good payment history. A comprehensive report will offer a decision on the tenant – a ‘pass,’ ‘fail’ or ‘no decision,’ which can help a landlord decide whether to rent to the tenant or not. A ‘no decision’ will usually only be applied if the agency is unable to carry out all of their checks (such as, if they’re unable to get hold of the previous landlord), or if the tenant is from overseas and therefore the agency has no UK based data to draw a report from.
What happens if the tenant fails the reference?
Although it’s a good idea to pay attention to the information outlined in the tenant reference, it’s not a requirement. Even if a tenant does fail the reference, you still have the right to rent the property out to them if you so choose. However, consider the fact that they’ve probably failed the reference for a reason, so you might want to do some further investigation into why they failed before signing any contracts. For example, it could be a case of an incorrect address on the credit file, which can be cleared up very quickly. On the other hand, they might have failed because they have an annual salary that’s below the affordability threshold - so you will want to verify whether they have any alternative sources of income that will help them to cover the monthly rent.
Alternatively, you could request that they obtain a guarantor. A guarantor will agree to co-sign the tenancy, essentially making them financially responsible to cover the rent outlined in the tenancy agreement should the tenant be unable to pay. A guarantor can cover all, or part, of the rent, and a tenant can have multiple guarantors for one tenancy agreement should they choose to. A guarantor essentially just offers the landlord peace of mind that the rent will be covered should the tenant run into any financial difficulty.
If the tenant needs to obtain a guarantor, then a landlord can choose to have the guarantor referenced, as well as the tenant – however, you will need to make it clear on the referencing application that they are the guarantor rather than the tenant, as this will enable the reporting agency to skip certain elements, such as the previous landlord reference.
Tenant referencing and rent guarantee insurance
Rent guarantee insurance is an optional cover that helps to protect landlords financially should their tenants have difficulty paying their rent. Dependent on your level of cover, a rent guarantee and legal expenses cover will protect your rental income in the event that your tenants are unable to pay, and will also cover the cost of serving notices against the tenant – an especially invaluable service for landlords that rely on the rental income to pay their mortgage. However, it’s important to remember that most rent guarantee policies will require the tenant to pass a tenant reference prior to the start of the tenancy, so check your policy documents to make sure you’re covered.
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