A deeper understanding of tenant applicants is critical to get the best tenants
You’ve shown a tenant applicant your property. You really hit it off, and you’d like to rent to them. They make you a rental offer that is acceptable, and you agree, subject to tenant vetting. You’re relieved. You’ve been searching for a great tenant for a long time. Then the unthinkable happens. The tenant applicant failed the tenant referencing. What should you do?
A tenant vetting fail may be a false negative
Tenant vetting should give you the background knowledge you need to make an informed decision. You’ll learn more about their work history, their financial situation, and their previous behaviour in rental property. Consequently, nine times out of 10 we would recommend that you don’t let to a tenant who has failed their tenant referencing. However, there may be some cases where you might make an exception to this rule.
Tenant vetting and referencing provide insight into potential problems. But it doesn’t tell the whole story. Occasionally, tenants who pass the vetting process turn out to be tenants from hell. It also works the other way: a tenant who failed vetting may become the best tenant you ever accepted.
Perhaps the most important part of vetting a tenant is that it prepares you for the possibility of something going wrong. You can then mitigate this risk. Perhaps you will decide to decline the applicant, though there may be reasons to consider the failure as a false negative. Here are three times when you might ignore the tenant vetting result, and how to minimise your tenant risk.
1. The tenant with a low credit score
Tenant vetting includes a credit score check. It may be that your applicant has a low credit score, but enough income to pay the rent every month.
You’d think a low credit score means the applicant can’t control their money well. If this is the case, then you’d be right to decline the applicant. However, it could also mean that the applicant has never had a loan, or a credit card, or an overdraft.
To assess someone’s creditworthiness, the credit checking firms need to see credit history. Only then can they assess that the person pays their borrowing on time. Ironically, no history of credit card, store card, loan or overdraft debt actually counts negative on a credit score!
You should consider the person as well as their credit score. Young professionals, students, and even some middle-aged tenants have never had debt, and so will have low credit scores. Yet they could make ideal tenants.
2. The tenant with no proof of address
Proof of address is one way in which you can prove an applicant’s identity. But this doesn’t mean to say they aren’t who they say they are. Usual forms of proof of address include utility bills, name on the electoral roll, and a previous tenancy agreement. What if the applicant can’t provide all of these?
Some tenants pay their rent inclusive of utility bills. If a tenant has only been in their home a short while, it would not be unusual for them not to be on the electoral role.
Our advice here is to request another proof of address – one that is not among the usual forms accepted. For example, a letter from the applicant’s bank may suffice.
3. The tenant fails the affordability test
You want to know that your tenant can afford the rent, month in, month out. So, what if their regular income falls short of what you would expect? Conventional wisdom says not to let your property to this applicant. But what if they have substantial savings from which they plan to pay or subsidise their rental payments? Or, perhaps, they have dividends or interest paid quarterly that bumps their income up to an acceptable level? Perhaps their parents will be paying some of the rent?
To accept such a tenant applicant, we would recommend that you request a guarantor. This person will be legally obliged to make rental payments should your tenant be unable to do so. A suitable guarantor will:
- Be of good character
- Have a good credit history
- Be in employment with a steady income
- Ideally, be a homeowner
Tenants who typically require a guarantor include students, the self-employed, people in low-paid jobs, and people who have a patchy work history. Want to know who the best guarantor maybe? Read our article “Why Big Daddy is the best guarantor a buy-to-let landlord could have”.
Understanding vetting failures is critical to a landlord’s success
Not all tenant applicants will pass the tenant vetting process. Before eliminating a tenant because of a referencing failure, you should seek to understand why they failed:
- A poor credit reference could paradoxically be a sign of a great money manager who has never needed to borrow money
- A lack of evidence of address could be due to previous tenancy circumstances
- Poor affordability based on current income may not tell the whole story of the ability to pay
Tenant vetting is essential, but it is best used as part of the risk assessment process you should use in the buy-to-let business.
If the reason for failing tenant vetting is that the applicant is a spendthrift and deep in debt, or a wanderer who fails to live in a single place for very long, or is constantly being released from low-paying jobs, then declining their application is a wise decision.
However, it may just be that there is a valid reason for vetting failure. If this is the case, then accepting the applicant may be no riskier than accepting a tenant who passes vetting with flying colours.
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