What is tenant referencing?

Tenant referencing is the comprehensive process through which landlords verify the suitability of prospective tenants before entering into a rental agreement. This process involves conducting various checks that provide insight into the tenant's ability to meet rental payments and follow the tenancy agreement.

Tenant referencing typically involves:

• Verifying the tenant’s identity and legal status in the UK.
• Conducting financial checks such as credit history and affordability.
• Obtaining references from previous landlords.
• Assessing the tenant’s employment status and income to demonstrate they can afford the rent.

Ultimately, the goal of tenant referencing is to ensure that the tenant will not only pay rent on time but also respect the property and the terms of the agreement. It’s a safeguard that helps landlords make informed decisions.

Why is tenant referencing important for landlords?

For landlords, tenant referencing is an important part of protecting their investment. Renting a property without properly referencing the tenant can lead to potential issues such as non-payment of rent, damage to the property, or conflicts during the tenancy.

Here are some of the main reasons why tenant referencing is important:

• Risk mitigation: by thoroughly vetting tenants, landlords can minimise the risk of renting to unreliable tenants who may cause disruptions, such as rent arrears or property damage.
• Legal compliance: UK landlords are required by law to conduct certain checks, such as the Right to Rent check, as part of the tenant referencing process. Failure to comply with these legal requirements could result in penalties or fines.
• Financial security: the referencing process ensures that the tenant has a reliable income and can afford the rent. This gives landlords confidence that the rent will be paid consistently, helping them avoid potential financial strain.
• Avoiding costly evictions: if a landlord rents to an unsuitable tenant, they may eventually have to evict the tenant. Eviction processes can be long, stressful and expensive, so tenant referencing helps to reduce the likelihood of reaching that point.

In essence, tenant referencing helps landlords make informed decisions that safeguard both their property and their financial well-being.

The tenant referencing process explained

The tenant referencing process is a step-by-step procedure designed to assess the suitability of a tenant for a rental property.

This process can vary depending on whether the landlord handles the referencing themselves or outsources it to a professional service, but it typically includes the following stages:

• Identity verification: this is the first and most basic step of the tenant referencing process. Landlords must confirm that the prospective tenant is who they claim to be, usually by requesting a valid passport, driving licence or other government-issued photo ID.
• Right to Rent check: this is a legal requirement for UK landlords and must be completed before renting out a property. Landlords need to verify that the tenant has the legal right to rent in the UK. For UK citizens, this may involve reviewing a passport or driving licence, while for non-UK citizens, landlords must check the tenant’s visa or immigration status.
• Credit check: this check reveals the tenant’s credit history, including any County Court Judgements (CCJs), bankruptcies, or debt issues. It also highlights any missed payments or defaults, which could indicate potential problems with rent payments in the future.
• Affordability check: this step involves verifying the tenant’s income to ensure they can afford the rent. Landlords can request an employer reference or ask for bank statements to confirm the tenant’s financial situation.
• Previous landlord reference: a previous landlord reference provides valuable insight into the tenant’s behaviour in previous tenancies. Landlords can ask for details about the tenant’s rental payments, property care and overall cooperation during the tenancy.

Understanding credit checks in tenant referencing

A credit check is a crucial part of tenant referencing and helps landlords assess whether a tenant has a reliable financial history.

When conducting a credit check, landlords or their agents will typically review the tenant’s credit history to see if they have any outstanding debts, County Court Judgements (CCJs), or a history of missed payments.

Credit checks can provide a clear picture of the tenant’s financial behaviour, including:

• Whether the tenant regularly pays bills and loans on time.
• Any past instances of default or non-payment.
• If the tenant is living within their means or overextending their credit.

It’s important to note that while a poor credit score might be a red flag, it doesn’t automatically disqualify the tenant. Landlords should take into account the full picture, including the tenant’s current employment and other references.

How to obtain a previous landlord reference

A previous landlord reference is one of the best indicators of how a tenant may behave in your rental property. When reaching out to a previous landlord, it’s important to ask detailed questions that can help you understand the tenant’s behaviour in past tenancies.

Some useful questions to ask include:

• Did the tenant pay rent on time every month?
• Did the tenant take good care of the property?
• Was the tenant cooperative during inspections or repairs?
• Would the landlord rent to this tenant again?

If a tenant does not have a previous rental history, such as with student tenants, it may be more difficult to get a landlord reference, so landlords may need to rely more on credit checks and guarantors.

Employment verification and affordability checks

Verifying a tenant’s income and employment is a big part of ensuring they can afford the rent.

A typical affordability check requires the tenant’s income to be at least 2.5 to 3 times the monthly rent. This helps ensure that they can comfortably meet their rental payments without financial strain.

Landlords can request an employer reference or ask for recent bank statements to verify the tenant’s income. The employer reference should confirm:

• The tenant’s employment status (e.g., full-time, part-time, contract).
• The tenant’s salary or hourly wage.
• How long the tenant has been employed by the company.

If a tenant is self-employed or receiving Universal Credit, landlords may need to request additional financial documentation, such as tax returns or letters from benefits providers, to confirm affordability.

Right to Rent: legal requirements for UK landlords

The Right to Rent check is a legal requirement for landlords in England. Landlords must verify that the tenant has the legal right to live and rent in the UK. This check can be done by reviewing documents such as a passport, visa, or using a government share code for non-UK nationals.

The Right to Rent check must be completed before the tenancy begins, and landlords who fail to conduct this check could face fines or legal action. It’s also important to repeat the check if the tenant’s visa or immigration status is time-limited.

The cost of tenant referencing for landlords

The Tenant Fees Act prohibits landlords from passing on the cost of tenant referencing to tenants, which means that landlords must now cover the tenant referencing cost themselves.

The cost of tenant referencing varies depending on the professional referencing service used, but landlords can expect to pay between £20 and £50 per tenant. While this may seem like an additional expense, investing in a thorough referencing process can save landlords large amounts of money in the long term by helping them avoid bad tenants who may cause financial or legal problems later on.

Handling failed tenant reference checks

If an applicant fails the tenant reference check, landlords should carefully consider the reasons behind the failure. A failed credit check or a poor reference from a previous landlord could indicate future issues. However, landlords may choose to proceed if the tenant can provide a guarantor or additional financial documentation.

In some cases, the tenant may have minor financial issues but still be a reliable occupant. In this scenario, landlords must weigh the risks and decide whether to proceed with the tenancy. It’s essential to ensure that any decisions are made based on a thorough understanding of the tenant’s overall financial and rental history. This helps avoid costly issues down the road, such as missed rent payments, legal disputes, and property damage.

By ensuring that a tenant is financially stable, responsible, and legally allowed to rent in the UK, landlords can protect both their property and their income.

The thorough tenant referencing process also ensures compliance with UK laws, particularly regarding Right to Rent regulations.

Letting agents and referencing services

Many landlords opt to work with letting agents or professional referencing companies to handle the tenant referencing process.  Letting agents bring expertise in tenant screening, allowing landlords to focus on other aspects of managing their property. They can conduct all aspects of the referencing process, from credit checks to obtaining references from previous landlords.

Working with a professional tenant reference provider can also ensure that all necessary checks are completed thoroughly and in compliance with UK regulations.Professional services often provide detailed reports that give landlords a clear picture of the tenant’s background and ability to meet their rental payments.

These reports can include everything from the tenant's employment history to their credit history and any records of missed payments. By outsourcing the process, landlords can also take advantage of fraud detection services, which help prevent issues with tenants providing false information or documents.

This added level of security can make the difference between finding a good tenant or dealing with a bad tenant down the line.

Handling special cases: student tenants and Universal Credit recipients

Landlords often face unique challenges when dealing with student tenants or tenants on Universal Credit.

Student tenants may lack a credit history or full-time employment, making it harder to assess their ability to pay rent consistently.  In these cases, it’s common for landlords to request a guarantor - usually a parent or guardian - to ensure that rent will be covered if the student is unable to pay.

For tenants receiving Universal Credit, the key concern is often verifying how much of their benefit payments will go towards rent. Landlords can request additional documentation to confirm the tenant's financial circumstances and may wish to structure the rental agreement to accommodate the timing of benefit payments.

Both of these groups - students and benefit recipients - are not inherently unreliable, but they require more detailed checks to ensure they can meet their rental obligations.

Additionally, landlords should be aware that refusing to rent to benefit recipients could be seen as discriminatory, so it’s important to focus on affordability rather than income source when conducting checks.

The tenant fees act and its impact on tenant referencing

Since the implementation of the Tenant Fees Act in 2019, landlords in England are no longer allowed to pass on the cost of tenant referencing to tenants.  As a result, landlords must now cover the tenant referencing cost themselves, which can range from £20 to £50 depending on the complexity of the checks required.

This law has made it even more important for landlords to use their resources wisely, ensuring that all checks conducted are thorough and provide the necessary relevant information. While this might seem like an additional cost, it is an important step to avoid potential losses in rent or property damage later on.

By understanding the implications of the Tenant Fees Act, landlords can budget accordingly for the actual costs of tenant referencing and make sure they don’t skip any essential checks, even when covering these costs themselves.

Making an informed decision with tenant referencing

The tenant referencing process provides landlords with all the tools they need to make an informed decision about who to rent to.

By following a structured approach that includes credit checks, previous landlord references, Right to Rent checks, and employment verification, landlords can feel confident that they are selecting the right tenant for their property.

Even though tenant referencing may seem like an upfront cost and effort, it’s an essential investment in the long-term health of your rental property.  By carefully screening each prospective tenant, landlords can avoid costly evictions, property repairs, or rent arrears, ensuring a smoother, more profitable tenancy experience.

Tenant referencing is not just about ticking boxes - it’s about gathering as much relevant information as possible to ensure that your tenant is reliable, responsible, and financially capable. With the right approach, landlords can minimise risks and enjoy a successful rental experience.

For bespoke advice from landlord experts on how to manage your property portfolio, contact the AST Assistance team today. Call us on 01706 619954 or fill out our contact form.