A tenant referencing process is a vital part of the renting process. It's what ensures that you get good tenants, protects your income and makes sure that your property is in good hands.
A tenant referencing process isn't just a formality, it's an integral part of the process that helps to determine whether or not you will proceed with the prospective tenants.
What is tenant referencing?
Tenant referencing is a process that landlords use to check the suitability of potential tenants. It is an essential part of the rental application process as it gives landlords the chance to assess a tenant's creditworthiness, affordability, and ability to meet their obligations under the lease.
What does tenant referencing involve?
During tenant referencing, the party conducting the tenant referencing process will confirm the tenant's identification by asking the prospective tenant for ID (passport or driving license) and proof of address in the form of a utility bill or bank statement.
In England, it is a legal requirement to conduct a Right to Rent check for any tenant or lodger living in your property. Failure to carry out a check can result in a fine of £3,000. To carry out the check you will need a code from the tenant and their date of birth. The tenant's Right to Rent can then be confirmed on the government website.
Before delving into the specifics of financial checks, it's important to understand the role of credit history in the tenant referencing process. Passing a credit check for renting is a crucial step, especially for those concerned about how their credit score might impact their rental application. A good credit history can significantly ease the process.
Financial checks
The status of the prospective tenant's overall financial health is checked. This is mostly done via a credit check. Credit checks confirm the identity of the tenant by providing the checker with the tenant's name, date of birth and address.
It also informs the checker of the tenant's payment history, outstanding debts, loans, bank accounts and credit cards. Furthermore, the party conducting the check would also be able to see if the tenants are linked to anyone financially, any CCJs (County Court Judgements) and individual voluntary agreements or bankruptcies.
Affordability
The letting agent or tenant referencing company will most often request payslips and/or the details of the tenant's employer to confirm whether or not the individual can afford to pay rent while staying at the property. Employer reference, along with the 'Right to Rent' check, is one of the most important checks as it confirms whether or not the tenant can afford to rent the property.
How much do tenants need to earn to afford the rent?
Most referencing agents will require the combined annual income of tenants on the tenancy to be 30 times the monthly rent price. If the monthly rent of the property is £2,000, the gross annual salary of tenants living in the property must be no less than £60,000. Some agents may require a gross income of at least two and a half (or even three) times the rent to pass tenant referencing.
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Suitability
Just like in employment, to assess the tenant's suitability the landlord will want a previous landlord reference. Whoever is carrying out the tenant referencing service will ask the prospective tenant for his previous landlord's contact details and then get in touch to complete the check. Common questions landlords are asked include:
- Does the tenant pay the rent?
- Does the tenant pay the rent on time?
- Does the tenant clean and look after the property?
A property is a landlord's financial asset, the landlord will wish to maximise profits and reduce expenses as much as possible. To reduce costs an ideal tenant would be someone who looks after appliances, reports any issues straight away and upkeeps the property which reduces expensive repairs down the line.
How long does tenant referencing take?
Tenant referencing should take no more than 48 hours however this can sometimes be delayed if extra information is required from the tenant. A more comprehensive referencing process can take slightly longer.
Who pays for tenant referencing?
Tenant referencing fees can start from as little as £8 and range all the way up to £75 per tenant. There are different pricing models and types of checks out. Some providers may do a basic, quick and cheap check while others may offer a more comprehensive service.
Under the Tenants fees act 2019, it is illegal to pass any tenant-referencing expenses on to the tenant. The landlord or the agent must absorb this cost.
When would an applicant fail tenant referencing
An applicant can fail tenant referencing due to a lack of affordability or if they have a CCJ, a history of bad debt or unfavourable references. Many times, tenants from abroad can run into difficulties when renting due to having no registered address and no credit history. In this instance, a guarantor can be provided who would guarantee the rent if the tenant fails to pay.
If you're looking to rent out your property, make sure to consider tenant referencing when accepting applications. You'll be able to screen potential tenants, and ensure that they have a good credit history and can afford the rent. Tenant referencing can also help you avoid damaging your property with bad tenants—so it's a win-win!