Landlords use the information presented to them in reference reports to assess an applicant’s suitability as a tenant and to mitigate the risk inherent in granting use of their property to strangers.  The basic aim is to ensure that applicants can:

–          Afford the property.

–          Take care of the property.

–          Pay the rent on time.

The below guide sets out in detail how the process works and why it is important for landlords.

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How does referencing work?

Referencing is a series of checks into an applicant’s background carried out at the request of either the landlord or letting agent. While the landlord/agent may do this by contacting your referees directly, more commonly this will process will be outsourced to a specialist referencing company. At Home Made, we work with Let Alliance to ensure thorough and reliable reporting for our landlords and a fair and transparent process for prospective tenants. A standard check will typically require a tenant to submit some, or all, of the following:

–          Recent bank statements.

–          Recent pay slips.

–          Current landlord/managing agent reference.

–          Employer reference.

–          Proof of current address – e.g. a recent utility bill.

–          Proof of previous addresses.

–          Tax returns (if self-employed)

–          Open banking

Though the volume of documentation required may seem quite daunting, most reference companies process submissions online. With adequate preparation, the application process itself usually takes little more than the time necessary to complete the online forms. If you’re a prospective tenant, we recommend collating the necessary documents and contact information as soon as possible after putting an offer forward.

If your current property is managed by an agency, speak with them prior to submitting your new tenancy application to gather the contact information for the correct person/department handling referencing requests. Likewise, it is worth identifying the correct point of contact at your employer (be it your line manager or a specific HR representative) to ensure that they issue a response as soon as possible. The more you can do to prepare at this stage, the swifter you will find the referencing process. Once forms have been submitted, reference reports are usually completed within 24-48 hours.

What is being assessed?

The referencing process seeks to establish that a prospective tenant fulfills two essential criteria:

Affordability

Landlords have a vital interest in determining whether a tenant can meet their financial commitments under the tenancy agreement. To that end, reference companies will check recent bank statements, pay slips, and employer references (or tax returns if self-employed) to determine a tenant’s ratio of rent to income. For instance, an employer might be asked to provide written testimony stating an applicant’s salary, length of employment, position, and type of contract.

The minimum acceptable ratio of rent to income varies between referencing company. At Home Made, our referencing partner asks tenants to demonstrate an income of at least 30 times their share of the monthly rent. For example, a tenant paying £800 in rent must earn an annual salary of at least £24,000. We believe this to be a threshold that provides ample security for landlords without being excessively prohibitive for potential applicants.

Referencing companies will also usually undertake credit checks to determine how well tenants have managed money in the past. They must first get your permission to do so. Referencing company credit searches might look for the following:

– County Court Judgements.

– HM Treasury financial sanctions.

– Bankruptcy orders.

– Voluntary arrangements.[1]

Honesty is the best policy if you know you have a poor credit history. Explain the situation from the outset and any steps you’ve taken to ensure that your finances are managed properly in future. While a bad credit score is likely to make your property search more complicated, landlords are infinitely more willing to compromise if all information is made available to them at the earliest opportunity.

Reliability

Rental property is a high value asset, and in many cases might be of sentimental value to the landlord. They want to know that a prospective tenant will keep the place tidy and in good working order, keep them informed of any major issues, and pay their rent and bills on time. To verify that tenants are reliable, referencing companies will seek references from current and previous landlords asking them to confirm that you respected the terms of the tenancy and paid the rent in full and as scheduled.

When submitting the referencing forms, applicants will need to provide full name, address and contact details for their current/previous landlords. It is worth advising referees ahead of time that they will be contacted to provide a reference, and to explain to them what they need to confirm.

If you suspect that your current landlord can’t or won’t provide positive references, flag this up with the landlord or agent prior to submitting your reference forms. Explain any extenuating circumstances or causes for any dispute with your current landlord and propose alternative ways forward. For example, you might be able to offer a character reference from your employer attesting to your reliability.

What happens if I don’t ‘pass’ referencing?

Referencing reports are not simple pass/fail tests. Instead, the referencing company will use their findings to make a recommendation about whether to proceed with a tenancy. Even if progression to tenancy is not recommended, this does not constitute an insurmountable barrier to renting a property. Life is complicated and landlords understand this. There are plenty of scenarios in which prospective tenants can comfortably afford the monthly rent but lack the means to demonstrate affordability.

A classic example would be a sales rep whose income is largely based on commission. While they may bring home more than enough on a monthly basis to afford rent, their guaranteed basic salary may not meet the required income threshold. In circumstances such as this, there are several alternative arrangements that can be pursued should reference reports have failed to satisfy. If you have significant savings, or receive any other type of stipend, please advise your Sales Associate so that this can be taken into account.

The two standard options are to put in place a guarantor agreement and/or the requirement to pay more rental money up front (i.e 6 months up front instead of just the first month). A guarantor is someone who agrees to cover a tenant’s share of the rent if they find themselves unable to pay. They must be over 18 years old, a UK resident, earning enough to pass affordability referencing, and they must have good credit history. If a tenant can find a suitable candidate to sign on as their guarantor, then this is usually enough reassurance for a landlord to proceed with a tenancy.

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