A Failed Rental Reference Doesn’t Mean the End of the Road
It sounds confusing, but just because a tenant fails referencing or a credit check, it doesn’t necessarily mean that letting your property to them is a bad idea.
Finding the right tenants is the main challenge of being a private landlord, and referencing is the best tool at your disposal. But the Pass or Fail on your referencing report isn’t the be all and end all of whether an enquiry will turn out to be a good tenant.
Here we take you through how to interpret the result of your referencing report for high-risk tenants.
What Is Included in Referencing?
Referencing provides a deep insight into a tenant’s background, including a written verification of employment and income, a previous letting reference or homeownership check, residency confirmation, affordability calculation and a full credit history check, including any outstanding County Court Judgements (CCJs).
Getting a tenant reference is not only in the landlord’s interest, but also assures the tenant that their new landlord has a professional approach and is interested in maintaining their property in the best condition.
What if my tenant fails their reference?
As a landlord, you want as much information as possible before letting someone live in your property. The more you know, the less risky the tenancy is. Referencing is the best way to get this information.
Always remember, however, that who you decide to let to is your choice. Referencing is useful because it reveals possible problems, but in the end, it is ultimately the landlord’s decision, even if the tenant fails referencing.
A tenant could fail a reference for various reasons, in different areas, yet still be a good choice for the property. But how? Let’s look at some examples here.
Example One: Tenant Has Failed the Affordability Calculation
The affordability calculation is designed to tell landlords whether a tenant’s income is high enough for them to take on the rent of the property.
A tenant can fail an affordability calculation if their income is less than two and a half times the rental amount. However, they may have significant savings which they plan to use to make monthly payments or they may be financially supported by parents or student loans.
Asking the tenant to provide a guarantor is a simple, fast way to proceed with confidence in this situation. The guarantor takes responsibility for paying the rent if the tenant defaults, protecting you from loss without adding to the tenant’s move-in moneys.
A suitable guarantor must be based in the UK, have a good credit history and should have sufficient income to cover their own living costs as well as the tenant’s rent. Although it’s not all over if a tenant fails a credit check, it is necessary for a guarantor to pass their referencing, as a landlord cannot take out Rent Guarantee Insurance without this, should they wish to do so.
A guarantor is particularly common for student tenants, tenants on low pay and tenants with a chequered employment history.
Example Two: My Tenant Has a Low Credit Check Score
Tenant referencing also includes a credit check. It is possible for a tenant to have a low credit score, and yet still be perfectly able to pay the rent. Once again, a failure on this section of the referencing doesn’t mean the end of the line for your tenancy.
The tenant may have a low score simply because they haven’t previously borrowed money or used a credit card. Although a low score raises a red flag initially, if it is caused by these factors, it needn’t be an impediment to your tenancy.
In this situation, simply putting the score in context is enough to help you make your decision. Students, recent graduates or other younger people may have very little credit history, yet be perfectly suitable.
Example Three: Students and Referencing
Of all tenants, students fit the mould of tenant referencing least. They move address often and usually have no credit history, meaning they will almost always have a low credit score. Plus they’re very unlikely to have a salary of 2.5 times the monthly rent, so will most likely fail the affordability rating.
Obviously, this does not mean that students make bad tenants: 14% of landlords let to students, after all, and most of them have no problems. Here again, it is common practice to provide a guarantor – often a parent.
To provide extra assurance to landlords, it can be worthwhile to try to get a reference from the previous landlord or student housing association, confirming that they have paid their rent on time and were good tenants. If they’re able to supply this, it should be enough to persuade you of their suitability as tenants and of the guarantor’s ability to make payments.
Example Four: My Tenant Has No Proof of Address
Being able to prove the tenant’s current address is a key step in avoiding fraud, so it is an important part of referencing. A lack of proof of address can result in a fail, but there could be a number of legitimate explanations for a tenant not being able to supply it.
Proof is usually made through named utility bills, the electoral roll or the previous tenancy agreement. But it would not be unusual for a tenant to be unable to provide any of these three things.
Often, tenants are not responsible for paying any of their bills. They may also have lived at their address too short a time to be registered on the electoral roll. It is also not unusual for their name not to be the tenancy agreement: e.g. if they have moved in with a cohabiting partner and haven’t been added to the contract.
In these scenarios, requesting the tenant to show a letter from their bank should be a simple way to confirm their address.
Understanding Why a Tenant Failed Referencing
If a tenant fails the referencing process, this doesn’t mean that you cannot let your property to them. The truth is, if you like the would-be tenant and feel they are a good fit for your property, there are many ways to get around a failed reference.
Referencing provides you with a risk assessment and helps you evaluate how risky letting to this individual could be. Ultimately, it’s your decision to investigate why the tenant failed the referencing check and to decide whether the reason for not passing is significant enough to not let to the tenant.
Why Passing Referencing Is Important
For some Rent Guarantee & Legal Expenses Insurance policies, it is a requirement that the landlord carries out references before the tenants move into the property.
It may not be possible to buy these policies if the tenant in question fails their reference. Often, a suitable guarantor can make the policies available once more, so even here a fail isn’t the end of your options as a landlord.
Priya Gill is a referencing expert at UK property insurers, Rentguard. OpenRent partner with Rentguard to provide an unbeatable referencing service and Rent Guarantee Insurance offer to landlords across the UK!