Handing the keys of a buy to let flat or house to someone you don’t know is always a worrying moment because there’s no way to ensure a tenancy will carry on without any problems. Life would be a lot simpler if landlords could foresee these issues before they arise, but the next best way to minimise the risk of things go wrong is to implement tenant referencing before a renter signs the tenancy agreement.
More landlords are taking on the job of referencing tenants with a ban on upfront fees switches the cost to them instead of the renter.
This guide explains how to go about taking tenant references and out the pitfalls of not keeping detailed records.
Tenant referencing is a vital job for landlords
Tenant referencing is one of those tasks a landlord should carry out properly or not bother.
There’s no halfway house, if you are referencing a tenant then you need to have a list of the checks you want to make to work through. Don’t stop halfway through because everything looks OK, because you might uncover some worrying information later.
Tenant referencing aims to establish four facts about the tenant:
- Financial status
- History with other landlords
- Do they have the right to rent the home?
Most tenants have been through the process at least once and have the information and documents you need to hand.
You should instantly look closer at tenants who dally over providing information or have lost their documents.
Referencing also proves you have investigated the tenant’s Right to Rent and supports any claim for arrears you may make later in court or against rent protection insurance.
Tenant referencing for landlords in 10 steps
Most landlords find a printed checklist handy for tenant referencing so all the points are covered.
You will need written consent from the tenant to carry out credit searches and third-party references.
Here’s what you need to do:
Phase 1 – Identify
- Identify your tenant with an official photo ID like a driving licence or passport. Other acceptable forms of ID include Home Office issued residency cards. If the tenant does not have a photo ID, ask for a birth certificate or a National Insurance card.
- Address check – Bank statements or utility bills no more than three months old bearing the applicant’s name and address. A mobile phone bill is not acceptable as this can go to any address.
- Right to Rent information – a legal requirement that requires similar information as the identity and address checks.
Phase 2 – Documents
- National Insurance number (NINO) – Proof someone is entitled to work in the UK
- Bank statement check – Get the three most recent statements to check how much and when the tenant is paid and how much spare cash they have at the end of the month. This confirms if they can pay the rent and that they are living within their means.
- Employer reference – Ask for confirmation of employment and pay on the company’s letterheaded paper and phone the person who sent the reference to check no one has tampered with the details.
Get the phone number from the company’s website. Tenants have been known to spoof the check by providing a friends phone number as an alternative.
If your tenant is self-employed, ask for business accounts or tax year reviews from HMRC for the past three years. The review shows the tenant’s taxable pay for each financial year.
Phase 3 – Qualify
- Landlord or letting agent reference – If the tenant is moving from a rented home, ask for a tenant reference and again check the details are accurate by calling them.
- Credit checks – This gives an idea of a tenant’s financial standing and if they have had money worries, like bad debts or bankruptcy.
Always ask the tenant about their credit history to cross-check against the credit reference. If they try to avoid responding, they may have court judgements registered against them.
An internet search will provide a list of firms carrying out the checks.
- Meet the tenant – If you can, have a face-to-face meeting so you can check the photo iD is correct and get the answers to any questions you might have
- Referencing a guarantor – A guarantor is someone legally obliged to pay the rent when the tenants can’t. Carry out the same checks for a guarantor as you do for the tenant.
If you have rent protection cover, check with the insurer to make sure you have covered all the checks needed to support a future claim.
Keep scans of all the documents and the time and date when you saw them. Ask the tenant to countersign to confirm they provided the document that’s a true copy of the original.
The affordability check
The affordability check tells landlords how much gross salary (before tax) a tenant or guarantor should earn each year to cover the rent.
Most letting agents and credit reference firms work on a multiplier of 2.5.
That means if the rent is £600 a month (£7,200 a year), the tenant needs a salary of £18,000 to comfortably afford the payment.
For guarantors, the multiplier is higher as they have their own bills plus a commitment to support the renter. Look for a salary that’s 3 times the annual rent – in the above example, that’s £21,600.
How do I know a tenant passes referencing?
If a tenant ticks all your reference checks, then you have done the most you can to reduce the risk of arrears and bad behaviour.
Most tenants will have a reference bundle with all the necessary paperwork if they have rented before.
Points to watch are missing or tatty documents scans when you need original documents and a reticence to give out names or contact details.
Who references a tenant?
Usually, the landlord or a letting agent references a tenant.
Letting agents will charge for the service but you will receive a professional tenant reference report while avoiding downtime and administration.
Send out the employer and previous landlord references first as these are the most likely to take time to return.
Expect to pay between £20 and £60 to reference each tenant. This is a cost you must absorb as the tenant fee ban makes charging the tenant illegal.
How long should tenant references be kept?
There’s no official time limit, although documents like the tenancy agreement are part of a landlord’s tax filings. You should keep the tenancy for 5 years after the year it was filed.
Most property professionals will keep the papers for the life of the tenancy plus a year or so to respond to references from other landlords.
Hopefully, you have found this article to be useful. You can keep it saved somewhere next time you need to carry out tenant referencing. For more information on your relationship with your existing or future tenants, you can read our article on The Landlord & Tenant Act 1985.