If you’re reading a referencing report for the first time, it can be hard to know where to start. This article will tell you how to read and interpret each part of a UK tenant referencing report and credit check.
As a DIY landlord, interpreting this information is key to selecting who will rent your property. You’re about to hand over one of your most valuable and prized assets to these tenants. If it all goes horribly wrong, it could cost you a lot of money and a lot of hassle. If it’s you first time in this situation, it can be quite a worry.
But there’s no need to worry. This article will tell you how to make decisions on referencing that are as good as, if not better than, your traditional high street agent. Remember, you’re vetting prospective tenants on their suitability for your particular property and how you like it treated, while the estate agent just wants to find tenants who are good enough to clear minimum requirements so they can close that sale.
So, where to start? First identify what you’re hoping to get out of the referencing process. For most landlords their primary worries are:
- Will the tenants pay the rent?
- Will they trash my property or be a nuisance to my neighbours?
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Will your tenants be able to afford the rent?
The key sections of the referencing report to pay attention to are Employment and Credit Check.
This is where you find out if tenants earn what they told you. Typically, a referencing agency requires the rent to be less than 35-40% of the tenant’s gross income (the exact figure varies by provider).
Beware, however, that’s 35-40% per tenant. If you’re using a single contract for the property, then the amount each tenant is responsible for is the full rent divided by the number of tenants. It doesn’t matter if one tenant earns a six-figure salary, takes the biggest room and has an agreement with the other tenants to pay half the rent – the referencing agency will treat each tenant as if they’re paying an equal share.
The referencing company will contact each applicant’s employer to confirm both employment status, length of service and salary. For comprehensive referencing, this will be done in writing but, if you choose speedier options, then this may be done by phone. For those applicants employed for less than 3 months, their previous employer is also contacted. The referencing agency will be particularly interested in finding out if there’s any negative reason why they left their last employment.
Assessing the employment status of self-employed people is done slightly differently. For this group a reference is requested from their accountant. They are also asked to supply their most recent accounts. The key thing to watch out for is whether or not the self-employed applicant has enjoyed a stable, steady stream of income for a reasonable period of time prior to the tenancy starting. If not, there could be a risk that the prospective tenant’s self-employed business does not take off as planned.
Tenant Credit Check
In many ways this is the most important section of the entire report. Information will be pulled from the files of a leading credit agency – usually Experian, Equifax or TransUnion – to check the prospective tenant’s credit worthiness and if they have had any recent adverse credit events such as county court judgements (CCJs), bankruptcies, or insolvencies. The presence of any of these records on the applicant’s file can indicate that they’ve been in financial difficulty and may have had issues in the past managing their finances. This does not necessarily mean that they will continue having problems going forward, but it’s worth having a chat to both the referencing agency and the tenant about the seriousness of the findings.
The credit check also highlights the number of credit agreements, such as credit cards and mobile phone contracts, the tenant held at their most recent addresses. A very large number of accounts is another possible indication that they’ve experienced financial difficulty although this isn’t always the case.
The referencing agency usually summarises the credit data that they collect into a helpful score that gives an idea of the risk that the tenant presents financially. The score is then graded from low to high to give you an idea what they think is an acceptable level of risk to take on.
Will your tenants behave themselves?
There is no way to be certain of this, but the referencing report does give you some clues that help you manage your exposure to risk.
Tenant Identity Check
An obvious, immediate red flag. If your prospective tenant is not who they say they are then alarm bells should start ringing. The reference agency carries out several checks to make sure all the information the tenant has supplied to you up to this point is correct.
One of the most important ones is the address check. The referencing company will ask the applicant for a list of their most recent addresses and check that these match the data held under their name at various sources, including the Electoral Register, utility providers and financial accounts. Their date of birth will also be checked across these sources.
They will also check the bank account details that they have given are correct. In addition, some of the bigger agencies will have their own internal database of tenants who have committed fraud, theft or defaulted on rent in the past. They may also check the tenants’ declared next of kin so you have an avenue to pursue should the tenant become uncontactable. Death records and government financial sanction alerts are also routinely inspected. If all these checks come back clear, then it is likely that the tenant is who they say they are.
Some reference agencies ask for a scan of tenants’ documents as part of the referencing process. If this is supplied, it can serve as another useful check on their identity.
If your new tenant was renting at their last address, their previous landlord or letting agent is asked if the tenancy was satisfactory. Typical questions they ask include: was the rent always paid on time? Did they damage the property? Would you rent to them again? Although it can’t be guaranteed that the previous landlord or agent will give accurate information, our experience is that it is more likely than not, that they will.
The final part of the report is usually a recommendation whether, based on the information they’ve uncovered, you should proceed with the tenant’s application. This is worth paying attention to although you can disregard the agency’s advice if there is information contained within the report you are uncomfortable with. Standard high street estate agent practice is to go with the recommendation given, but you will probably feel much more secure having a close look at the information behind the decision.
Sometimes the recommendation will be a ‘no’ based on affordability and a guarantor will be recommended. It is worth considering using a guarantor for two reasons. Firstly, the financial requirements for the guarantor are usually more stringent than for the tenant; typically they need to earn four times the share of rent. Secondly, the guarantor is often someone the tenants would be embarrassed to tell they’re having financial struggles – a parent, for example. Some landlords have told us that their most reliable tenants are those who have parents as guarantors.
It is also worth being aware that if you’re interested in purchasing Rent Guarantee Insurance, then it is almost certain you will need your tenant, or their guarantor, to have a positive recommendation from the referencing agency.
Referencing can never fully guarantee what new tenants will be like but satisfactory answers to the referencing agency’s questions should guard against fraud and increase the likelihood your tenants will pay the rent on time and look after your property..
At the end of the day, it’s also worth remembering that the decision on vetting is yours and yours alone. As a self-managing landlord, you will have had the benefit of meeting your new tenants upfront and you may have learned things about them, in person, that the referencing agency process doesn’t take into consideration. It’s your decision and listening to your gut instinct is always a valid part of the referencing process.