Income Verification Primer

Income Verification Primer

Ensuring your tenants can afford rent is crucial for protecting your property and providing a successful rental experience. The screening process should include thorough verification of a prospective tenant’s employment status and wages. Knowing the tenant can pay their rent on time eliminates unnecessary landlord-tenant disputes related to late rent payments and avoids financial difficulties and costly, time-consuming evictions. 

During the screening process, you should ask detailed questions to help you get a clearer picture of the prospective tenant’s capability of paying rent. This guide provides all the information you need to verify prospective tenants’ income. 

Benefits of Verifying Income

As a landlord or property manager, verifying a tenant’s income confirms whether a prospective tenant has the financial stability to pay rent and meet their lease obligations. It ensures that you are renting your property to responsible and trustworthy tenants, reducing the risk of late payments. Here are more benefits of verifying income:

Assessing Affordability

One of the biggest concerns amongst landlords is non-payment of rent. This is often due to a tenant not being able to cover the costs of their monthly rental payments. According to one study that analyzed housing court cases, the average amount that tenants owed to landlords was $3,900. By looking at a tenant’s rent-to-income ratio beforehand, you can protect yourself and your real estate investment. While every landlord has their own risk tolerance level, the industry standard is that a tenant should not spend more than 30% of their income on housing. 

Protect Your Property

Proof of income protects you from losses if a tenant damages the property during their stay. It also protects against defaults and other financial issues during the tenant’s tenure. 

Compliance with the Law

The Fair Housing Laws prohibit tenant discrimination based on various factors such as race, color, sex, religion, disability, national origin, and familial status. A tenant may accuse you of discrimination based on one of these if you evict them. Verifying their income before accepting them into your property can help protect you from evictions and complications that come with them.

Improve the Screening Process

Income verification is a key component of the tenant screening process. It helps you make informed decisions about which tenets to let on your property. Understanding each potential tenant’s rent payment capabilities ensures you only accept responsible and reliable tenants. 

Have a Lower Tenant Turnover Rate

Accepting financially stable tenants makes you less likely to face financial difficulties or disputes, which might lead to a lower tenant turnover rate. Tenants who can pay their rent on time and meet their lease obligations will likely stay longer on your property. 

When and How to Verify a Prospective Tenant’s Income

One tool that you should always add to your tenant screening toolbox is Income Insights. This is an add-on to the report that you run through LandlordStation. It analyzes the potential tenant’s self-reported income against the data from the credit report to recommend if additional income verification is needed. 

A successful verification process should consist of requesting the following documents:

Tax Returns

Tax returns outline a person’s total earnings, expenses, and annual taxable income. If the prospective tenant is self-employed, the document provides a comprehensive picture of their financial situation, which can act as proof of income. During the screening process, consider asking for the tax returns for the last two years to get a clear picture of the tenant’s income and financial stability. 

Pay Stubs

Pay stubs show a person’s earnings for a particular pay period. They include information such as hourly wages, total revenues, and deductions. You can use the information on these documents to verify the tenant’s capability of paying rent on time. 

Bank Statements

You can request bank statements to view the prospective client’s financial transactions over a period, including deposits and withdrawals. The information provides a clear picture of whether the tenant has a steady income to meet your tenancy requirements.  

W-2 Forms

These are tax forms that show the employee’s yearly earnings. You can use them to verify the tenant’s employment status. 

1099 Forms

These tax forms show any income the tenant earns from non-employment sources. They are helpful if you want to verify the income status of unemployed tenants. 

Court-Ordered Statements

These documents show if the prospective tenant is receiving financial support as child support or alimony. The tenant should provide the documentation of the payments to give you an insight into their capability to pay their rent on time. 

Employer Letter

You can request a tenancy applicant for a letter from their employer summarizing their salary and earnings. However, you need to use other verification methods, as the wrong tenant can easily forge the letter just to get a house on your property. 

Disability Insurance

A tenant who cannot work due to a disability can show you their reward letter from the insurance company or court indicating the monthly amount they receive. You can use the document as a verification of income. However, you should consider asking for further proof of income when the worker’s compensation ends.  

Pension Distribution Statement

If the potential tenant is retired, they should be able to provide a pension distribution statement outlining how much they receive and the frequency. You can get the information from the 1099 tax forms

Unemployment Documentation

If the prospective is unemployed, they should provide unemployed documentation to show their eligibility for unemployment benefits. The documentation should outline how much they receive to ensure they can afford to be on your property.

These documents provide valuable information about a tenant’s income and financial stability. You can use the information on these documents to decide which tenants to accept on your property and which ones to turn away. 

Signs You Should Verify Income

As a landlord or property manager, it’s important to be aware of red flags indicating that a prospective tenant may have trouble paying rent. While not all prospects require income verification, certain signs may indicate a need to ask for proof of income. Some common signs include:

  • Low credit score: If the tenant’s credit score is low, it may indicate late or missed payments due to financial difficulties. 
  • High debt-to-income ratio: A high debt-to-income ratio might indicate that the tenant may struggle with paying bills, including rent.
  • Inconsistent employment history: If the tenant has a history of frequent job changes, it might be a red flag that they will struggle with rent at some point. 
  • Limited rental history: A history of evictions or a lack of any rental history can be a warning sign that a tenant may have trouble paying rent in the future.
  • Difficulty providing employment information: A tenant who cannot provide detailed information about their current or previous employers might be hiding something. 

How to Protect Your Decision Legally

In addition to the above tips, you can protect yourself legally from tenants who fail to pay rent on time, make partial payments, or fail to pay. Taking these steps reduces the risk of financial loss and protects you legally if a tenant is troublesome regarding rent.

  1. Have a written lease agreement that lays out the terms and conditions of the tenancy, including rent amount, due date, and penalties for late payments. The lease should clearly outline the agreement between you and the tenant and have both signatures.  
  2. Screening the tenants by asking for their credit and rental history. If you still need clarification, go as far as checking references and employment status. 
  3. Ensure all prospective tenants sign a rental application, including their contact information, employment, and history. 
  4. Keep detailed records of all rent payments, communication with the tenants, and repair and maintenance you perform on the rental property. You can use this information as evidence in court if necessary. 
  5. Request a security deposit to cover damages or missed rent payments. Familiarize yourself with your state’s law regarding security deposits
  6. If the tenant fails to pay rent, follow the proper eviction procedures in your state to protect yourself legally. Avoid taking matters into your hands or attempting to evict the tenant without a court order, as you might be breaking the law. 

Bottom Line

Whether a property management company or a landlord, you must verify a prospective tenant’s income before letting them into your property. When verifying this information, ensure you follow the above best practices and tips to minimize the risk and protect your interests when renting your property. 

At LandlordStation, we understand the importance of properly vetting and screening your tenants. Our property management software empowers landlords to run tenant screening. We can also help once you’ve approved your new tenant, with comprehensive built-in solutions for collecting online rent payments, handling maintenance orders, and so much more. Contact us today to learn more about how LandlordStation can make property management easier.