For landlords, one of the most important aspects of tenant screening is ensuring that your potential tenants have a consistent income source they can use to pay the rent in full and on time. This factor can be even more important than criminal records or prior eviction histories.
But you can’t just ask your applicants how much money they make; you need to verify the answers they give because people might either make honest mistakes or purposely mislead you about their income.
There are many ways to collect proof of income, so the documents you need will vary by applicant. Ideally, you’ll use both a primary proof of income and a secondary one to back up the information you get.
Once you know how much money a prospective tenant has coming in (and also how much they have going out, if you look at their bank statements), you can use that information to decide whether that applicant can afford your property.
In this piece, you’ll learn the many options for what can be used to prove income, the pros and cons of those options, what to do with the income information, and more.
Remember: It’s in the best interest of both you and your potential tenants to rent only to people who will be able to make their rent payments.
How Can a Landlord Verify an Applicant’s Income?
Landlords who use a property management company have it relatively easy: They can save time by having the property manager collect proof of income as part of the tenant screening process.
If you don’t have a property manager, then it’s up to you to ask applicants directly for proof of their income, in the form of bank statements, paycheck stubs, or other documents. The best documents that can serve as proof of income are explained later in this piece.
Fortunately, many of these documents can be verified by making a quick phone call or by checking them against the applicant’s other income verification documents.
For example, a landlord may ask for an employment verification letter and then call the employer to ensure the letter is authentic. Alternatively, unemployment benefits documentation might be confirmed by verifying that the listed payments appear in the applicant’s bank statements as deposits.
Related: How to Find Good Tenants With Online Rental Listings
Why Should a Landlord Request an Income Verification?
Income verification should be part of your tenant screening process because renting an apartment to someone who is trying to live beyond their means puts you at risk of having a tenant who pays their rent late or misses payments entirely.
Unfortunately, you can’t just trust someone who says they can afford your property. Remember: They might lie about how much they make or honestly miscalculate how much they can afford in rent each pay period.
What Is Verifiable Income?
Verifiable income is any money that an applicant can prove they earn. It’s a key consideration for landlords and lenders when deciding whether to rent an apartment to a tenant or make a loan to a borrower.
There are many types of documents that can provide proof of income, such as bank statements and pay stubs. More types of income verification documents are explained later in this article.
How to Verify Income for Prospective Tenants
There isn’t a one-size-fits-all method for verifying income. The proof of income you request from someone who works for an employer will differ from applicants who are self-employed, for instance.
You might have prospective tenants who are retired, who depend on disability payments, who receive unemployment benefits while they’re between jobs, and more. So, you’ll need to use the proof-of-income documents that make the most sense for each potential tenant.
And remember: In most cases, you’ll want both a primary proof of income and a secondary one to be sure you’re getting an accurate picture of the potential tenant’s ability to pay the rent. Some of the most popular proof-of-income documents are explained below.
What Can Be Used as Proof of Income?
Bank statements
Bank statements work well for both people with conventional jobs and self-employed individuals. For workers with conventional jobs, bank statements are typically a secondary proof of income that backs up the applicant’s pay stubs or W-2 tax forms, while for self-employed workers, banking information is likely to be the primary source of income verification.
The most recent two to three months’ worth of bank statements are usually sufficient, but you might want to look further back if the potential tenant has a job that is based entirely on commissions, as those can vary a lot from month to month. You want to ensure the applicant’s income is relatively consistent and that you weren’t just shown a particularly lucrative month or two.
In addition to showing you a renter’s income through deposits in their account, bank statements can let you check for overdraft fees and see if the applicant has a history of consistently paying recurring bills. After all, the rent you charge them will become a big, recurring bill.
Pay stubs
Pay stubs are one of the most common ways to prove income. It’s usually easy for a potential tenant to get them from their employer, either as hard copies or online.
Ask for pay stubs from at least the past two months. This will show you if the applicant’s income fluctuates and how often they receive regular pay stubs.
A pay stub should show an employee’s full name, their employer’s name and contact information, the gross income the applicant earned and how often paychecks are issued.
Note any regular deductions on the pay stubs that lower net pay. Also watch out for any overtime pay, which can make it seem like the potential tenant consistently makes more money than their base salary.
After reviewing a tenant’s pay stubs as proof of income, file them securely. Consult your state’s laws that govern how long you should retain this information.
Tax returns
Tax returns are useful because they show both the applicant’s unearned income and overall income history. However, they aren’t necessarily an up-to-date snapshot of a person’s finances, since they show earnings for the previous tax year, not the current year. For instance, they wouldn’t reflect that a potential renter had recently gotten a promotion. Additionally, not every prospective tenant is going to have these forms readily available.
W-2 forms
A W-2 form can provide a good picture of yearly income, which is particularly useful for commission-based work or seasonal workers. But again, this proof of income shows past earnings rather than the applicant’s current earnings situation.
The prospective renter might have changed jobs recently or gotten a raise. Also, W-2s might not be as easy to access as things like bank statements or pay stubs.
1099 forms
Self-employed workers don’t receive W-2s from the clients they work for, but rather 1099 forms. They’re simple to verify. But many self-employed people have multiple clients and therefore multiple 1099s, making income verification trickier. For instance, are you sure you have all of an applicant’s 1099s? Are some for one-time jobs that won’t bring in any income in the future? In this situation, you may want to use a different type of verification.
Employment verification letter
An employment verification letter is usually simple for an employee to obtain and has more current information than tax returns and forms. A letter from an employer might also vouch for a potential tenant’s reliability, making it an excellent proof of income.
It’s possible a renter might try to fake this letter, which is why you should always call the employer to verify that the letter is legitimate.
Investment account statement
Some applicants might receive passive income from investments in the form of interest or dividends. You can check this amount by looking at investment account statements, or the tax forms that get reported to the IRS. Those are 1099-INT forms for interest, and 1099-DIV forms for dividends.
These payments are often a reliable source of income, but for most people, this income is supplemental, not their main source of income. (Think about it: An applicant who has a large enough investment portfolio to live off of their interest and dividends is likely wealthy enough to own a home, rather than needing to rent one.)
So, while investment income might tip the scales and enable someone to afford your rent, these statements alone are unlikely to show that an applicant has enough to cover monthly rent payments.
Disability insurance statement
Some applicants might have a disability and receive regular payments from the Social Security Administration’s disability insurance program or from their state program.
These payments equal a percentage of the person’s income before a disability forced them to stop working, with the amount of the payment based on complex formulas the government uses. Also, they might last for a predetermined amount of months or years, or until the recipient reaches a certain age.
The person’s disability insurance statement is solid proof of income. And disability checks are a steady source of income. Just make sure to check how much longer the applicant will continue to receive the payments.
Social Security benefits statement
You might have retired applicants, in which case many of the previously mentioned proof-of-income documents don’t apply. In this situation, a Social Security benefits statement can work well as an income verification document. Potential tenants can easily download and provide you with their Social Security income letter. Still, you may want to check that the benefit amounts show up as deposits in their bank statements or other proof-of-income documents.
Pension distribution statement
A pension is usually an excellent, steady income source. Pension income is reported on form 1099-R in a filer’s tax return.
Pension distribution statements show retirement benefits and annuities. Unfortunately, it can be challenging to differentiate monthly distributions from annual distributions on these documents. The pension might also change the distribution amount over time, raising questions about whether the applicant’s ability to pay the rent in the future could be affected.
Unemployment benefits documentation
For prospective tenants between jobs, you can use unemployment benefits documentation as proof of income. These funds are guaranteed by the government. However, make sure to check the documents for an expiration date to see if the benefits will run out soon and affect your tenant’s ability to pay the rent soon after they move in.
Related: 9 Best Real Estate Crowdfunding Sites + Platforms
Tally All Income Sources
Add up all of an applicant’s income sources they have documented to see how much total monthly income they receive. Note that there might be miscellaneous income besides the documents listed in the section above, such as child support, so ask the applicant if any income sources are missing.
Once you’ve tallied all income documents, you can compare the total to your monthly rent price.
Calculate the Rent-to-Income Ratio
In most parts of the country, personal finance experts recommend that renters spend about 30% or less of their income on rent. For example, if you’re considering renting to an applicant and the rent is $1,600 per month, you would look to see if their gross monthly income is about $4,800 or more.
However, in high cost-of-living cities, such as San Francisco or New York City, the 30% rule isn’t always realistic. In very expensive cities, it isn’t uncommon for residents to pay closer to two-thirds of their income on rent.
Depending on your rental location, you might only want to accept tenants whose monthly income is high enough to clear that 30% bar. In larger cities, you might be a little (or a lot) more lenient.
Whatever your policy on income thresholds, you must hold all applicants to the same screening standards. You can’t deny one tenant for having insufficient income and then accept another tenant who makes the same or less income. Decide on your rent-to-income ratio standards and maintain them for all applicants.
Related: 7 Best Banks for Real Estate Investors + Landlords
Best Banks for Real Estate Investors + Landlords—Our Top Picks
|
Comprehensive Rental Financial Solution + Bank Account
|
Low-Cost Digital Business Banking
|
Unlimited Free Business Banking Accounts
|
|
Primary Rating:
4.7
|
Primary Rating:
4.0
|
Primary Rating:
3.8
|
|
Free, no fees. Get $150 to open a bank account and start collecting rent.
|
Standard: No monthly fees. Plus: 1 month free, then $30/mo.* Premier: 1 month free, then $95/mo.*
|
Free, no fees for basic product; fee-based premium services available
|
Using Verified Income to Pay Rent
Suppose you’re satisfied with the income documents you’ve received and are confident a prospective tenant makes enough each month to cover your rent without financial strain. This person might very well be a good tenant.
Ideally, you’ll have an online rent payment system that will let tenants set up recurring payments. Otherwise, you’ll have to trust they’ll use their income toward rent each month and not other costs.
Related: 6 Ways to Invest in Apartment Buildings [w/Minimal Effort!]
How Does a Landlord Verify Income for Prospective Tenants? FAQs
How do landlords verify bank accounts?
Landlords sometimes ask renters for recent bank statements as proof of income.
A bank statement shows the applicant’s account number, account type (checking, savings, etc.), the date the account was opened, who owns the account, a summary of deposits and withdrawals, overdraft information, and more.
This information can show the likelihood of a tenant being able to comfortably cover the rent for your property each month. When renting to a new tenant, you might request some of their banking information, such as an account number, to set up online rent collection.
Tenants who pay a security deposit with a check are also providing some bank details, such as their bank account number and routing number.
Potential tenants who don’t feel comfortable sharing their bank account information can ask the landlord if they can verify that they have a stable income through other means, such as by providing their tax forms or pay stubs.
Do credit bureaus provide proof of income?
No, credit bureaus cannot provide proof of income. Although documents like credit card applications may ask about income, an applicant’s income doesn’t show up in a credit report. Credit reports can show data about a consumer’s debts, but not how much money they make.
What do you do when the prospective tenant has no proof of income?
If a rental applicant admits to having no income or can’t provide any documents for you to verify income, this tenant might not be able to afford your rent, and it’s wise not to rent to them. You can legally deny a tenant application for this reason.
Handle declining the tenant properly and in compliance with housing laws. Make sure the rejection letter or phrasing you use complies with the Fair Housing Act and any applicable state and local housing laws.
If you decide not to rent to an applicant because of any information contained in a consumer report such as a background check or credit report, you must tell them in writing why they were declined, to prove that you didn’t turn them down for discriminatory reasons.
Some landlords will rent to an applicant with no income if the person gets a guarantor to co-sign the lease. Again, if you made that decision based on any information from a consumer report on the applicant, you must explain in writing the reason you are requiring a guarantor. In the event a tenant stops paying rent, the guarantor is legally responsible for making the rent payments. This arrangement is worth considering if you’re renting in an area that has a lot of unemployed college students who have parents willing to co-sign their leases.
Related:
