As a landlord, you want to be sure that anyone who rents from you can pay rent in full and on time every month. While it might seem like an invasion of privacy, requiring prospective tenants to provide proof of income is essential for your financial security.
Verifying income can help you determine if tenants are able to fulfill their lease obligations and reduce the likelihood of missed or late rent payments. By exercising due diligence and confirming this information, you can also safeguard your own income stream. So how exactly do you verify an applicant’s proof of income? Below are 10 different methods you can use.
How to verify proof of income
During the tenant screening process, you can request any of these documents from prospective renters. Using a combination of these documents, you’ll be able to get a more complete picture of the tenant's financial situation.
1. Pay stubs
A pay stub typically includes details such as the applicant's name, employer information, pay period, gross earnings, deductions, and net pay. It’s a great way to confirm an applicant's employment status and assess their income stability. However, if you request pay stubs, be sure you know how to spot fake ones.
2. W-2 tax form
In addition to a pay stub, you can also request a W-2 tax form which summarizes an applicant's annual earnings, including wages, salaries, bonuses, and withheld taxes. Not only does a W-2 form give you an overview of an applicant’s income from the previous tax year, but it also verifies if the information on their application is accurate.
3. Tax returns
Tax returns are another valuable document that you can use to verify a tenant's income. By reviewing an applicant’s IRS 1040 tax returns from the past one or two years, you can gain insights into their annual income and any deductions claimed. Keep in mind that a tax return will only show you income details for the previous tax year, not the tenant’s most up-to-date income.
4. 1099 tax form
If an applicant is a freelancer, gig worker, or is self-employed, you can ask them to submit a 1099 MISC form. Keep in mind, they may have several 1099’s and that the income reported in a previous year may not necessarily match their current or expected future income.
5. Bank statements
Bank statements provide a detailed record of an individual's financial transactions, including income deposits, withdrawals, and account balances. Like a 1099, this proof of income is particularly useful if an applicant is self-employed and can’t provide consistent pay stubs. You can also request a bank statement if the applicant is currently unemployed. As a general best practice, be sure to ask for at least two or three months’ worth of statements.
6. Offer letters or employment contracts
Requesting an offer letter or an employment contract can help confirm an applicant’s self-reported income and employment status, especially if they recently started a new job or are in between jobs. If an applicant hasn’t received their first paycheck yet or if there are concerns about the authenticity of the offer letter or contract, you can reach out to the employer via phone or email for verification on official company letterhead. These documents typically outline the terms of employment, including salary, start date, and any bonuses or incentives which will give you a good idea of whether or not applicants can afford rent.
7. Bonus and incentive payments
In addition to an offer letter or employment contract, bonus and incentive payments can supplement an applicant's base salary and are an additional source of income that may improve their ability to afford rent. But since bonus structures can change over time and aren’t always a guarantee, don’t rely solely on this information to inform your decision regarding a candidate.
8. Workers compensation letter
If an applicant was injured in a workplace accident, they may be receiving workers' compensation. By requesting a workers compensation letter you can make a more informed decision about whether or not the applicant is a good candidate because it may indicate the stability of their income. At the very least, you’ll be able to confirm how long they’ll be compensated for and the total amount.
9. Social Security benefits statement
Social Security benefits statements from the Social Security Administration (SSA) are for individuals who receive payments from the government as either their main source or supplementary income due to continued employment or disability. The statement typically includes benefit details such as monthly payment amounts, cost of living adjustments, duration, and expiration.
While Social Security benefits are typically reliable and consistent because they provide a steady source of income for applicants, they may not be sufficient to meet the rental requirements, especially in areas with high living costs. It’s also important to recognize that the statement may not provide a comprehensive picture of an applicant's financial situation, since it only reflects Social Security income and does not account for other sources of income or expenses.
10. Unemployment statement
If a potential tenant is unemployed but receives government unemployment benefits, they should have documentation showing the amount they receive regularly as income. However, the duration of unemployment benefits is usually limited, so an applicant's income may be uncertain beyond the duration of their claim.
What if an applicant can’t provide proof of income?
If an applicant can’t provide proof of income, it can definitely raise concerns but it doesn’t mean you need to automatically disqualify them. Instead, there are other things you can do if you choose to proceed with their application such as:
Consider co-signers or guarantors
In cases where a tenant's income is insufficient or difficult to verify, you can require them to have a co-signer or guarantor. For example, if the applicant is a recent college graduate with little to no prior income, they may have a parent be their co-signer. A co-signer or guarantor is someone who agrees to be legally responsible for the lease obligations if the tenant fails to pay rent or damages the property.
Evaluate alternative income sources
Some applicants may have alternative sources of income that are not reflected in traditional proof of income documents. For example, applicants may receive income from investments, retirement benefits, or government assistance programs that can be verified through bank statements and other documentation.
Assess rental history and creditworthiness
While credit reports primarily focus on an individual's credit history and score, they can also provide information about other sources of income such as loans, credit cards, or other financial accounts. A positive rental history and a strong credit score can help build a case for an applicant's financial stability even if they can't provide a comprehensive proof of income.
Require an additional security deposit
In situations where applicants cannot provide proof of income, you can ask for a larger security deposit. A higher security deposit can act as a financial buffer in case the tenant defaults on rent payments or damages the property.
Conduct an in-person interview
Conducting an in-person interview with prospective tenants gives you an opportunity to discuss their income, employment, and financial situation. Face-to-face meetings allow you to ask specific questions and gauge an applicant's credibility and reliability. The interview process is also an ideal time to get to know a prospective renter better so you can determine if they will be a good fit for your rental.
Contact their previous landlords
Contacting previous landlords can provide valuable insights into an applicant's rental history and financial responsibility. They should be able to give you more information about a candidate's payment history, reliability, and if they would recommend that individual as a future tenant.
How to spot fake proofs of income and protect against them
Believe it or not, 93.3% of property owners and managers experienced rental application fraud in the past year. To make sure you don’t fall victim to these scams, here’s several giveaways that signal fake proofs of income:
- Inconsistencies or irregularities
- Formatting errors
- Misspelled words
- Discrepancies between the applicant's stated income and their lifestyle or spending habits
- Numbers that have been rounded
- The number "0" is replaced by the letter "O"
- Illegibility or unprofessional
Applicants who are dishonest with their financials can put your property at risk. With income verification tools, you can access databases and financial records to confirm employment and income details provided by the applicant.
Income verification with RentSpree
When a tenant fails to pay rent, it not only impacts your return on investment but can also lead to costly consequences, such as the eviction process. But conducting a thorough tenant screening, including income verification and rental history checks, you can proactively mitigate potential tenant issues in the future and protect your rental business.
With RentSpree’s tenant screening—which is free for all property representatives—you can capture all the necessary information and documents you need to verify an applicant's income. That way, you can be confident about choosing the most ideal applicant, every time. Sign up now.
