Tenant credit checks and screening are two of the most important processes to be carried out prior to letting your property.
While gut feeling and experience can help you form an opinion on a prospective tenant, the facts and figures that are revealed by a credit check are crucial to any decision.
After all, any tenant must be able to pay rent.
And that means they must be able to pass checks on their ability to do so – both for a landlord’s peace of mind and that of the tenant themselves, who may be over-stretching themselves financially.
But how do you go about performing a tenant credit check?
The best way is to allow a managing lettings agent to take charge. A good agent will be able to undertake a thorough screening of any prospective tenant, as well as undertaking a credit check.
But for landlords managing their own properties follow this guidance for undertaking credit checks on tenants.
Tenant credit checks
To undertake a credit check on a potential tenant through a credit reference agency, you must first gain permission to do so from the tenant.
This would usually be sought through the tenancy application form via a managing agent, where a tenant would need to sign and date expressing permission for their credit data to be obtained by a landlord.
Two popular credit referencing agencies in the UK are Experian and Equifax.
Landlords need to register to use the services, which provide a whole host of information on your prospective tenant’s credit history. If using a managing agent the Landlord does not need to register with the referencing agency.
What you learn from a credit check
As part of the credit report on your potential tenants, you will be able to see any accounts that are overdue.
This could be store or credit cards, as well as finance on cars or mobile phones, for example.
You’ll also be able to see any history of bankruptcy, eviction or foreclosure on a property.
The credit report will also show a list of any late payments on credit accounts and loans, including how many times an account payment was late and how late payments were.
Things to consider on a credit report
While late payments or overdue credit should set the alarm bells ringing, you should also consider the timeframes involved.
For instance, if a potential tenant has a poor payment record in 2013 but an exemplary one since then, you could consider them a changed person who would make a good tenant.
Alternatively, a tenant with a poor recent history of payments against a previously good record might be wrong for you as a report such as this would appear to suggest they are in ongoing financial difficulty.
The importance of screening
While credit checks are important, you should also screen your tenants more thoroughly.
While their store card payment history may be flawless, those details don’t reveal their history of paying rent on time or of looking after rental properties.
To ensure peace of mind over rent payments, you should perform an affordability stress test on prospective tenants.
Again, a good managing agent will do this as part of their tenant screening process.
A good affordability test is to ensure your tenants’ annual income is 30 times the monthly rent.
So, for tenants to rent a property costing £1,000 per month, they would need a household income of at least £30,000.
Another option for landlords is to seek an employment reference.
You should be looking to confirm that your proposed tenant is in full or part-time contracted employment and that their employment is likely to continue for the duration of the tenancy.
The same check can be carried out for those on temporary work contracts.
Finally, one of the best ways to screen a tenant for suitability is to obtain a reference from previous landlords.
This will reveal more about the tenant’s character and personality, as well as their history of paying rent and their level of care towards previous rental properties.
If you want the process of tenant referencing to be taken out of your hands, contact your local Martin & Co office who will be happy to discuss their managed services with you.