Do All Tenants Need To Be Referenced?
Yes. All adult tenants aged 18 and over must be named on the Tenancy Agreement and whether they are contributing financially to a share of the rent, all tenants will be required to have a reference check completed.
Tenant referencing is an essential part of the letting process, giving the Landlord the reassurance that his/her new tenants are who they say they are, work where they say they work and are able to make rental payments.
Acceptable referencing reports are also the basic requirement to be eligible for a Rent Guarantee Protection, which is a type of insurance provided to Landlords should their tenants ever fall into rent arrears.
Most Rent Guarantee insurance policies insist the tenants have either appropriate references or a guarantor.
It is imperative that Landlords comply with any reference demands made by their insurer, otherwise they risk their insurer refusing to pay out should a claim be made.
Informal Referencing: Before The Tenancy Is Agreed
All good Letting Agents will carry out a short survey with the prospective tenants during the initial enquiry about the property they would like to rent. The five ‘W’ questions are:
- Who – name, address, telephone, email, occupation, marital status?
- What – furnished/unfurnished, flat/house/bungalow, number of beds/baths, garden, garage, parking, pets?
- Where – which area are they looking to move to?
- When – timeframe for move, flexibility?
- Why – upsize/downsize, schools, job relocation, first home?
This allows the Letting Agent to verify the applicant(s) suitability for the property they enquired about and if suitable, to arrange a date and time for them to view.
Should the applicant(s) make an offer which is deemed acceptable by the Landlord, the applicant(s) must then pay the reservation fee and the official referencing process will be started by the lettings negotiator.
The vast majority of estate agencies rely on third-party referencing companies, who take over the time-consuming, in-depth process and provide the agent with an easy to understand report once all the checks are completed.
Once the formal referencing process has begun, the tenant will be contacted and asked to fill out a questionnaire online.
The formal referencing consists of the following parts:
Right To Rent Check
Introduced under the Immigration Act 2014, the Right to Rent check is a legal obligation for Landlords to ensure that any tenant has ‘Right to Reside’ in the UK.
All applicants will be required to provide two forms of ID: one photographic, such as passport, and the other one to confirm proof of current address, usually a utility bill or a bank statement dated within the last three months.
Should the applicant have a passport issued outside of the European Union, extra documentation will be required (such as a visa or resident permit) to confirm how long they may remain in the UK and whether they have permission to study and/or work.
It is a standard practice to check that tenants can afford to make the monthly rent payments. Affordability is calculated by the household earnings of the tenant(s) being enough to qualify against a set Rent vs Income ratio, which is typically set at 2.5 times annual income.
Rent: £1,200 per calendar month
Annual Rent: £1,200 x 12 = £14,400 pa
Required Household Annual Income: £14,400 x 2.5 = £36,000
This means the tenant (or household, if more than one applicant is looking to move into the property) must show a gross income of at least £36,000 per annum in order to pass the financial reference.
The employment reference should confirm the salary stated by each applicant together with information on their employment status (permanent, contract, part-time, zero hours) and conditions, such as probation periods. Last three months’ payslips might also be required.
A credit reference is also usually undertaken. Every person has a credit score and this can affect their ability to purchase items via credit. This check will also provide information on any County Court Judgements (CCJs) or bankruptcies against them.
This type of credit check will also usually show if the applicant has been found on the electoral roll, which in turn will verify the current address provided by the tenant. The report may also show if they have been located at other addresses. Referencing companies will ask for the last 3 years of address history for each applicant.
Should the applicant have an adverse credit history or an income below the minimum standards for the chosen property, a use of a guarantor might need to be necessary.
What is a Guarantor?
A guarantor is a third party to a tenancy who will agree to pay the rent to the Landlord should the tenant fail to do so.
The guarantor might not only guarantee the rent but also any other financial commitments of the tenancy such as the cost of dilapidations at the end of the tenancy.
When is a Guarantor Required?
There are several circumstances when a guarantor might be necessary in order for the tenant to live in their desired property, such as:
- The tenant is unemployed, such as a UK student (international students sponsored by their Government do not require a guarantor if they can provide proof of sponsorship which meets the Rent vs Income ratio). Student loans are not acceptable as a source of income.
- The tenant is in receipt of benefits and does not necessarily meet the required Rent vs Income ratio.
- The tenant is in temporary work and does not hold a permanent contract.
- The tenant simply does not earn enough to pass the Rent vs Income ratio assessment.
A guarantor will need to be referenced in the same manner as a tenant and have no adverse credit history. The guarantor will also have to sign a legally enforceable deed of guarantee.
The guarantor is required to meet a higher Rent vs Income ratio, which is usually 3x the individual’s annual contribution to the rent for which they are guaranteeing.
It is important for the Letting Agent to share all of this information with the Landlord in order for them to make an informed decision as to whether the applicant is suitable for their property.
Every Landlord has the right to physically see the potential tenants’ final referencing reports as well as their IDs and proof of address.
The references should not be shared with the applicant. These are sought in good faith and only for the purposes of the Landlord.