Lesson 2: Referencing and Affordability

Selecting the right contract-holder is one of the most important decisions a landlord will make. A thorough referencing process can significantly reduce the risk of rent arrears, property damage, disputes, and possession proceedings. While no referencing system can completely eliminate risk, carrying out appropriate checks allows landlords to make informed decisions based on evidence rather than assumptions.

 

Referencing should be conducted fairly, consistently, and in compliance with data protection and equality legislation. This lesson examines the key components of tenant referencing, including credit checks, employment references, previous landlord references, affordability assessments, and the use of guarantors.

Why Referencing Is Important

Referencing helps landlords assess whether an applicant is likely to meet their obligations under an occupation contract. The process can help determine:

• Ability to pay rent.
• Employment stability.
• Rental history.
• Financial reliability.
• Potential risks.

Effective referencing helps landlords:

• Reduce rent arrears.
• Minimise disputes.
• Protect rental income.
• Make objective decisions.
• Select suitable contract-holders.

Referencing should form part of every landlord’s risk management strategy.

 

 

All applicants should be assessed using consistent criteria. A consistent process helps:

• Reduce discrimination risks.
• Improve decision-making.
• Create transparency.
• Demonstrate professionalism.

Landlords should avoid making decisions based on assumptions, stereotypes, or personal opinions. Instead, decisions should be based on objective information gathered during the referencing process.

 

 

Before commencing referencing, landlords should obtain basic information from the applicant. This may include:

• Full name.
• Current address.
• Contact details.
• Employment details.
• Income information.
• Previous addresses.
• Occupancy requirements.

Accurate information helps support subsequent checks.

 

 

Referencing involves processing personal information. Landlords must comply with:

• Data Protection Act 2018.
• UK GDPR.

Information should be:

• Collected lawfully.
• Stored securely.
• Used appropriately.
• Retained only as long as necessary.

Applicants should understand how their information will be used.

Credit Checks

Credit checks are commonly used to assess an applicant’s financial history. They can provide useful information regarding an individual’s financial conduct.

 

 

A credit check reviews information held by credit reference agencies. It may reveal information relating to:

• Credit commitments.
• Payment history.
• County Court Judgments.
• Insolvency records.
• Financial associations.

Credit reports help landlords assess potential financial risk.

 

 

Credit checks may indicate whether an applicant has a history of:

• Missed payments.
• Debt problems.
• Financial instability.
• Court judgments.

However, credit checks should not be relied upon in isolation. They should form part of a wider assessment.

 

 

A poor credit score does not automatically mean an applicant will be a poor contract-holder. Similarly, an excellent credit score does not guarantee future performance. Landlords should consider:

• Employment.
• Income.
• Rental history.
• Supporting explanations.

A balanced approach is usually preferable.

 

 

A County Court Judgment (CCJ) may indicate previous financial difficulties. Landlords should consider:

• The amount involved.
• How long ago the judgment occurred.
• Whether it has been satisfied.
• The overall circumstances.

Not all CCJs carry the same level of risk.

 

 

Employment references help verify income and employment stability. They are particularly useful where applicants rely on employment income to pay rent.

 

 

Employment references can help confirm:

• Employment status.
• Length of employment.
• Job position.
• Income levels.

This information assists with affordability assessments.

 

 

Employers may be asked to confirm:

• Employment status.
• Contract type.
• Annual salary.
• Length of service.

Some employers provide limited information, while others offer more detailed references.

 

 

Applicants with long-term permanent employment may present lower financial risk than applicants with uncertain income. However, employment type should not be the sole factor considered.

 

 

Self-employed applicants may not have traditional employment references. Alternative evidence may include:

• Accountant confirmations.
• Tax returns.
• Business accounts.
• Bank statements.

Landlords should consider the overall financial picture.

 

 

Previous landlord references can provide valuable insight into an applicant’s rental history. Past behaviour is often a useful indicator of future conduct.

 

 

Previous landlords may provide information regarding:

• Rent payment history.
• Property condition.
• Conduct during occupation.
• Compliance with contract terms.

This information can assist landlords when assessing risk.

 

 

Landlords may ask whether:

• Rent was paid on time.
• The property was maintained properly.
• Complaints arose during the occupation.
• The landlord would rent to the individual again.

Responses should be considered alongside other evidence.

Verifying References

Landlords should exercise caution when reviewing references. It is sensible to verify:

• The identity of the referee.
• Ownership or management of the property.
• Contact details.

Fraudulent references occasionally occur.

Affordability Assessments

Affordability assessments help determine whether an applicant is likely to be able to meet their rent obligations. This is often one of the most important aspects of referencing.

What Is an Affordability Assessment?

An affordability assessment compares income against rental commitments. The objective is to determine whether the applicant can realistically afford the rent.

Common Assessment Methods

Many landlords and agents use income multiples. For example, they may require annual income to exceed a specified multiple of the annual rent. The precise criteria vary between landlords and agents.

Additional Financial Commitments

Landlords should consider that applicants may have other financial obligations. Examples include:

• Loans.
• Credit card repayments.
• Child maintenance.
• Vehicle finance.

These commitments can affect affordability.

Household Income

Where more than one applicant will occupy the property, affordability assessments may consider combined household income. This may improve affordability outcomes where both occupants contribute towards rent.

Benefits and Universal Credit

Some applicants receive benefits or Universal Credit. Landlords should assess affordability based on the applicant’s overall financial circumstances rather than making assumptions. Each application should be considered individually.

Assessing Overall Risk

No single factor should determine whether an applicant is accepted. Landlords should consider:

• Income.
• Employment.
• Credit history.
• Rental history.
• References.
• Guarantor availability.

A balanced assessment generally produces better outcomes.

Guarantors

A guarantor is a person who agrees to accept responsibility for certain obligations if the contract-holder fails to meet them. Guarantors are commonly used where additional security is required.

When Might a Guarantor Be Used?

Examples include:

• Students.
• Applicants with limited credit history.
• Self-employed applicants.
• Applicants with affordability concerns.
• Applicants new to the country.

A guarantor may help reduce perceived risk.

What Does a Guarantor Do?

Depending on the terms of the guarantee, a guarantor may become responsible for:

• Rent arrears.
• Property damage.
• Other contractual breaches.

The scope of liability should be clearly defined.

Guarantor Referencing

Guarantors should generally be referenced in a similar manner to contract-holders. Checks may include:

• Identity verification.
• Employment checks.
• Income verification.
• Credit checks.

A guarantor who cannot meet the obligations may provide little practical protection.

Written Guarantee Agreements

Guarantees should normally be documented in writing. The agreement should clearly explain:

• The guarantor’s obligations.
• The extent of liability.
• The duration of the guarantee.

Professional legal drafting is often advisable.

Independent Advice

Guarantors should be encouraged to seek independent advice before entering into a guarantee. This helps ensure that the obligations are understood fully.

Warning Signs During Referencing

Landlords should investigate concerns such as:

• Inconsistent information.
• Unverifiable employment.
• Poor references.
• Unexplained gaps in history.
• Reluctance to provide documentation.
• Evidence of financial instability.

Further enquiries may be appropriate where concerns arise.

Common Referencing Mistakes

Common mistakes include:

• Skipping referencing entirely.
• Relying solely on credit scores.
• Ignoring affordability.
• Failing to verify references.
• Treating applicants inconsistently.
• Keeping inadequate records.

These mistakes can increase the risk significantly.

Best Practice Recommendations

Professional landlords should:

• Use a consistent referencing process.
• Verify the information provided.
• Assess affordability carefully.
• Consider the overall circumstances.
• Retain referencing records securely.
• Comply with data protection requirements.
• Document decisions.

A structured approach improves decision-making and supports compliance.

Record Keeping

Landlords should maintain records of:

• Application forms.
• References obtained.
• Affordability calculations.
• Guarantor documentation.
• Decisions made.

Good records may help defend against future complaints or disputes.

Lesson Summary

Referencing and affordability assessments are essential tools for selecting suitable contract-holders. Credit checks, employment references, previous landlord references, affordability assessments, and guarantor arrangements can all provide valuable information about an applicant’s ability to meet their obligations.

 

No single factor should determine the outcome of an application. Instead, landlords should adopt a balanced, evidence-based approach that considers the applicant’s overall circumstances. By conducting referencing consistently and professionally, landlords can reduce risk, improve decision-making, and increase the likelihood of a successful occupation contract.

Knowledge Check

Question 1

What is the primary purpose of referencing?

A. To increase rent.

B. To assess suitability and reduce risk.

C. To replace occupation contracts

D. To avoid inspections

Question 2

What can a credit check reveal?

 

A. Property condition

B. Employment contracts only

C. Financial history and court judgments

D. Future income

Question 3

Why are employment references useful?

 

A. They verify income and employment status

B. They replace affordability checks

C. They guarantee rent payments

D. They determine EPC ratings

Question 4

What is the purpose of a guarantor?

 

A. To insure the property

B. To carry out repairs

C. To provide additional financial security

D. To manage the property

Question 5

Why should landlords conduct affordability assessments?

 

A. To estimate property values

B. To determine whether rent is likely to be affordable

C. To calculate council tax

D. To assess maintenance costs

Answers

1. B
2. C
3. A
4. C
5. B