Screening prospective tenants is a tedious but necessary part of being a successful landlord. Nationally, the average eviction rate is around 3%. However, according to the Aspen Institute Financial Security Program, post-COVID eviction rates could jump as high as 20% in the coming year. As job and income loss heavily weigh on renters’ minds, landlords must be more diligent than ever in verifying proof of income. After all, this is vital to determining an applicant’s ability to afford to pay rent on time consistently. So, continue reading below as we outline various ways landlords can verify proof of income as part of a robust screening process.
Verifying Proof of Income as Part of the Tenant Screening
The reality is an applicant can say whatever they feel with best serve them on a rental application. This means it is up to the landlord to set the records straight through tenant screening. When it comes to verifying tenant income, there are three basic steps landlords should follow –
- Verify Income Documentation
- Complete Employment Verification
- Check for Creditworthiness
Verify Income Documentation
The first step is to solicit the proper documentation from every applicant. While the type of documentation may vary from tenant to tenant, the goal is the same. Regardless of what proof of income documentation an applicant provides, it should contain all of the following information:
- Tenant’s Full Name
- Employer Name (if applicable)
- Identifying Information (Social security number, birth date, etc.)
- Income Amount and Evidence of Frequency
Complete Employment Verification
Even with documentation, landlords should still verify current employment. Depending on the circumstances, you may be able to call and speak with the employer’s HR department to verify over the phone. If not, issue an employment verification request. This is an essential step to check and be sure they make the income they claim.
Check for Creditworthiness
Is a credit score everything? No. Is credit score and credit history important to a landlord’s decision? Yes! Therefore, perform a credit check on each applicant to evaluate their financial capabilities further. A credit check is not just about the overall score. Instead, focus on overdue accounts, high balances, unpaid debts, or accounts in collections. Chances are, if the tenant is behind in their everyday bills, paying rent will prove to be a struggle.
Additionally, review a tenant’s total debt compared to their income. If a tenant’s debt outweighs their income, this presents a huge red flag for property owners.
13 Ways to Show Proof of Income
Establishing steady and verifiable proof of income is important for landlords as it shows an applicant’s ability to afford the rental rate. Typically, requesting at least two forms of income verification is standard practice. That said, there are various documents tenants may use to prove they have the income needed to support the rent. Check out the list below!
Top 5 Ways to Show Proof of Income
- Pay Stubs – Jobs that offer a steady paycheck, whether full or part-time, will provide the renter with paystubs. These paystubs show how much a tenant makes per pay period and at what interval. Furthermore, paystubs are easily verifiable with their employer. Therefore, this is the most common way to establish proof of income.
- Tax Returns – Whether it is a tax return or employment W-2, tax documents are a great way to verify proof of income. These documents show what the individual earned over the course of the entire year, giving landlords a wealth of information.
- Bank Statements – Another popular proof of income source is the use of bank statements. These may show regular deposits from an employer or a pattern of withdrawals to pay rent at a previous property. However, landlords should request at least the most recent 3 months’ worth of statements as one does not always show an accurate picture.
- Social Security Documentation – Those individuals receiving social security payments can use these statements as proof of income. That said, if this is the only source of income for a tenant, be aware that social security benefits could change depending on a variety of circumstances.
- Disability Payments – Similar to social security benefits, disability payments are a verifiable source of income. Additionally, depending on the category of a disability case, these payments could change or even discontinue over time.
Other Ways a Renter Can Show Proof of Income
- Proof of Commission Payments – Commission only employees have the potential for high income. However, the downside for landlords is that their income can fluctuate from month to month. That said, if the applicant can show proof of income along with stable rental payment history, they could be a great tenant.
- Employer Letter – If a pay stub is not available for whatever reason, landlords can directly accept a letter from the employer. Furthermore, landlords could maximize this opportunity to speak with the employer as a tenant reference in addition to verifying income.
- Pension or Retirement – Pensions or retirement accounts will either offer a monthly statement or yearly statement that a tenant can present as proof of income.
- Regular Court-ordered Payments – Any court-ordered payment such as alimony is a viable income source that landlords can easily verify. The downside is it relies on someone else to make those court-ordered payments. Therefore, if they stop for some reason, that can cause issues for your prospective tenant.
Common Ways to Show Proof of Temporary Income
- Unemployment Benefits – Applicants receiving federal or state unemployment benefits can utilize this as proof of income when seeking an apartment or rental property. Although, these benefits are typically temporary and will eventually end. So, consider the applicant’s previous work history and remember that many jurisdictions protect the source of income under Fair Housing Law.
- Severance Statement – If a person is laid off by no fault of their own, many companies offer a severance package. Typically, this involves a lump cash sum that the individual can use to bridge the employment gap. If this is the tenant’s only source of income, landlords should proceed with caution as severance is a one-time payment and not a means to pay ongoing rent.
- Workman’s Compensation – Unfortunately, these payments are temporary. So, landlords need to determine when they are expected to end before accepting this as a viable extended income source.
- Annuity Statement – Annuities offer tenants a steady payment schedule from an insurance company in exchange for a lump sum. While landlords will appreciate the steady stream of funds going to the tenant, annuities do have expiration dates.
How to Establish Proof of Income If a Tenant is Self-Employed
When traditional employment sources are not in the picture, how does a landlord verify proof of income? While a self-employed individual may not have paystubs, their income is still traceable through other means. That said, look for the following to verify proof of income for a self-employed rental applicant –
Self-employed applicants should show landlords a steady stream of income flowing to their account each month. As you should with any bank statements as proof of income, request at least the past few months. Thus, allowing landlords to form a clearer picture of the applicant’s financial capability.
Tax Form 1099
For anyone earning greater than $400 in self-employment income, 1099 is required. Like a W-2, this form shows how much the individual earned over the previous year. Therefore, 1099 along with bank statements, can provide sufficient proof of income for landlords to consider.
Why is Rent to Income Ratio Important to Landlords?
According to experts, renters should strive to spend no more than one-third of their income on the monthly rent. That said, this is not always a realistic expectation. So, landlords should use the proof of income documentation to evaluate rent versus income ratios to see if an applicant can truly afford to pay the rent you are asking. Take a look at the formulas below that landlords may find useful in reviewing rent to income ratios.
The 3x Rule
In general, a widely accepted metric throughout the industry is that rental household income should equal or be greater than three times the monthly rent. So, for example, in a $1200 a month property, the occupant’s gross income should be greater than $3600 per month.
Rent Coverage Rule
Using a rent coverage ratio allows landlords to calculate affordability by dividing income by total expenses. An acceptable rent coverage ratio is above 1.3. For example, if a tenant’s monthly income is $3,600 and their expenses, including rent, are $2,000, their rent coverage ratio would be 1.8. Thus, this tenant could comfortably afford the monthly rent.
Screening prospective tenants is a landlord’s first line of defense against non-payers and possible evictions. Therefore, it is not a process to rush or take lightly. So, take your time when verifying proof of income and be sure to select the best applicant possible based on their combination of factors.
Are you worried you will not find a qualified applicant? In today’s reality, the task is more daunting than ever. So, why not enlist professional help from a qualified property management firm? Bay Property Management Group is the local choice for targeted marketing and top-notch tenant screening services. Give us a call today to see what full-service rental management can do for you and your investment!