Checking a Guarantors Ability to Pay
In this article, David Lawrenson of LettingFocus.com, looks at how you can check a guarantor’s ability to pay rent or make good costs of damages, if a tenant should fail to pay.
Checking a Guarantor’s Ability to Pay
Sometimes when we have checked out a tenant, it appears they do not have sufficient income or solvency for us to be sure that they can pay rent comfortably for the duration of a tenancy term. They may, in these circumstances, propose a guarantor.
If they do, we then need to check out the guarantor too.
So what things do we check for with guarantors?
First, we require that the guarantor has to be a home owner. This is because, should we ever need to make a recovery of money, it’s a lot easier if the person who is owing us money, owns a property. Of course, that property has to be in the UK. A property abroad is no good to us at all.
The guarantor also has to have enough income and “free cash flow” to pay the rent or pay for damages, should we have cause to go to them because the tenant has failed to pay.
What do I mean by “free cash flow”?
Well, it means they must have enough spare cash to pay the rent over and above their other financial commitments.
So, to establish this, we ask to see the last six months’ worth of bank statements for the guarantor. We look at these carefully to see how much money is going in and how much is going out of their account.
We look especially carefully at any loan payments leaving the account and we look for evidence that this is their main bank account too. If there is little activity on it – no supermarket payments, no utility bills and no mortgage payments plus no salary going in, then we may ask why this is the case, and ask to see other bank accounts.
We like to see a healthy level of credit in the account, which is being maintained month by month and not being depleted.
If the rent that the tenant is to pay is say, £1,000 a month, then we must see evidence that the guarantor is currently in a position to save at least that amount each month. If he cannot save that amount each month, then where will the money magically come from to pay us the rent we are due?
If he is not in such a happy position to save at least the rental amount each month, then we will need to see other savings that can be called on at short notice instead. So, if the tenancy agreement is to be for 12 months’ at £1,000 per month, we would expect to see at least £12,000 sitting in a short or zero notice savings account somewhere.
Put it in a nutshell, the guarantor must be well off!
And yes, the process of referencing a guarantor is more intrusive than for a tenant.
Guarantors Must Be Well Off
Many tenants and their guarantors just don’t seem to understand all this.
Indeed, in our time as landlords, we have seen many guarantors put forward who are only just managing to “pay their own way”. This is no good to us, as we might one day need them to not only pay their own way but also pay for our non-paying tenant too!
For guarantors, we also perform all the usual checks we would do on any tenant – we run credit checks and check the ID of the guarantor as well as performing the “Right to Rent” checks, the latter being a legal requirement now. We might also seek an employment reference stating that the guarantor is not under threat of redundancy – as if they are, that is also something we need to know as part of our assessment. We check ownership of property at the land registry, which costs just £3 per check. We don’t take their word for it!
We will ask the guarantor to sign a legal deed – which must be witnessed by a neutral third party. The deed will explain their liabilities and how long their liability to us will last for – which is as long as the tenancy lasts for, including any extensions of the tenancy. This must all be carefully spelled out in the deed.
Once the tenancy starts, the guarantor must be kept copied in on all correspondence with the tenant over matters like damages, extensions of tenancies and rent increases.
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We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.
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