Landlord’s Guide to Verifying Proof of Income
As a landlord or property manager, verifying a potential tenant’s proof of income is an integral part of the tenant screening process.
Yet, how does the income verification process work? In most cases, it would be rude to inquire people about their personal finances, but when you’re a landlord, it’s a required part of the rental application process.
Ready to get started? Read on to discover the different methods a landlord can use to verify proof of income to find their ideal tenant.
What is proof of income?
Proof of income is the documentation that shows salary and/or income over a set period of time. Typically, a landlord will request to see a document or set of documents that show earnings from the past two to three months. However, this can vary depending on the landlord and the tenant.
Proof of income demonstrates to the property owner that the prospective tenant can afford the agreed-upon monthly rent and it validates whether they have a steady income.
5 ways to verify proof of income
Below are five different types of documentation that can verify a tenant’s proof of income:
1. Pay stubs
Pay stubs, also known as paychecks, are the most common form of proof when it comes to income verification. Anyone with a full-time or part-time job can make copies of their pay stubs from their employer to share with a landlord. This can validate if the tenant has a regular income each month (or if it fluctuates) and can help estimate their yearly salary.
For landlords, it’s best practice to ask for the last three months of pay stubs during tenant screening.
2. Annual tax returns
A federal tax return is a great way to verify a renter’s income from the past year, especially since it’s an official legal document. Specifically, a renter can provide the landlord with an IRS 1040 (Individual Income Tax Return), which shows both unearned income and overall income.
If the renter is self-employed though, they may want to share their 1099 form. Since they don’t have a traditional employer, a 1099 form confirms wages and taxes for the renter. Some renters may have both documents to show their main source of income, as well as supplemental income.
3. W-2 tax form
Alongside pay stubs, landlords can also look at W-2 forms to verify income. As an income document, the W-2 form shows when an employer withholds payroll taxes from the employee’s earnings. It’s a good income verification method because it’s created by a reputable source (employer) and shows what the renter’s declared income was.
However, on the downside, this document isn’t always fully accurate since it doesn’t show if the renter had any job changes or raises. It’s also dependent on whether the prospective tenant has received their most recent W-2 form yet.
4. Letter from an employer
A landlord or property manager can also request that the applicant provide a letter from their employer, also known as a salary verification letter or income letter. In this letter, the employer confirms the salary information of the tenant. If there are concerns about the letter’s validity as income documentation, ask for employment references that can be additionally reached out to and confirm the gross income amount.
5. Bank Statements
This is another great option for a tenant that is self-employed. Since they wouldn’t receive a regular pay stub, a bank statement is another official document that can give an in-depth, big picture look into the tenant’s personal finances, including deposits and withdrawals. To make the process more efficient, a landlord may choose to ask the renter to clearly mark where incoming payments are within the documents.
Just like payslips, landlords should aim to receive two to three months’ worth of bank statements to provide an accurate picture of the tenant’s usual income. This will help the landlord determine if the prospective tenant can afford the monthly rent.
Why is it important for a landlord to verify proof of income?
The bottom line for landlords is to turn a profit with their rental unit, whether it’s an apartment, house or condo. Income verification ensures that the landlord is doing their due diligence to confirm that a prospective tenant can afford the monthly rent.
If a tenant can’t pay rent, it’ll end up hurting the landlord’s overall return on investment and could lead to lengthy and expensive repercussions, such as an eviction process. Most tenants don’t plan to fail to make rent payments — especially since doing so can give them a bad credit score — but it happens. In fact, some applicants may not consider the additional cost of utilities and other unforeseen expenses. If they’re not included, be sure to let the tenant know ahead of time so that they can also determine for themselves if they can afford your rent.
Landlords should always be thorough during tenant screening through income verification and rental verification to avoid unnecessary tenant problems in the future. Income verification helps property owners take that extra step to identify an ideal tenant, someone who will pay the agreed-upon monthly rent consistently and on time.
How to determine if a prospective tenant can afford rent
Most landlords utilize a rent-to-income ratio to properly identify if a tenant can afford rent. Currently, the ideal percentage is 30%, so rent shouldn’t take more than 30% of the tenant’s monthly income.
Depending on the area, the general rent-to-income ratio may be higher or lower. For example, if an applicant is in a lower income bracket, it may be better to expect a 20% income requirement to ensure that they can still afford other necessary expenses (e.g. utilities, groceries, loans, etc.).
If a landlord is concerned about applications from those who cannot afford their rent, they may choose to include this ratio information in the rental listing. This will help deter under-qualified tenants from submitting rental applications for units that they cannot afford.
To calculate the income to rent ratio with the standard 30%, take the tenant’s total annual income and divide it by 40. This will give an approximation equal to 30%. If the amount is more than the monthly rent, then the tenant can afford it.
Explore AAOA’s rent-to-income ratio guide for more information.
What to do if your tenant has no proof of income
If a tenant doesn’t have proof of income, it doesn’t necessarily mean they can’t afford the monthly rent. Depending on the rental market, a landlord or property manager may choose to approve the renter if there are other ways to guarantee that they can consistently pay rent.
The main path a tenant with no proof of income can take is to get a guarantor. This option is extremely popular in cities with many college students. Basically, a guarantor can co-sign the tenant’s lease to confirm that rent can be paid. This legally ensures that if the renter doesn’t pay rent, then the guarantor will have to make up that payment. For tenants, the guarantor is usually a parent or relative that is willing to pay for their rent or vouch for their finances.
If a tenant is unable to provide a guarantor, it may not be feasible to rent to them. A landlord needs concrete proof that a renter will pay rent, otherwise, they may be susceptible to fraud, missed payments or, worst-case scenario, an eviction and legal proceedings.
Income verification documents may prevent these cases from occurring and can help find a suitable prospective tenant.
Income verification and tenant screening with AAOA
As a landlord, you don’t have to manually go through the income verification process alone. That’s where AAOA can help streamline the process with our tenant screening services.
By opting for our services, you can reprioritize other important day-to-day responsibilities. Through our tenant screening process, you can easily verify whether a tenant can afford your monthly rent to help you choose the ideal applicant.
Excited to get started? Join AAOA today.