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You may have been denied a rental due to your credit score, but you can still find other ways of qualifying as a tenant. Landlords must verify income and provide proof to secure the tenancy agreement.
Here are 7 ways landlords can do so.
Landlords should request evidence of income from potential renters to ensure that they can afford to pay rent and to rule out the possibility of fake papers. Pay stubs are the greatest evidence of income, but landlords should also collect and examine at least one additional proof of income document.
Property managers demand extra fees to manage tenants and the property since they are not a rent collecting agency. Fees for property management range from 4% to 10% of total monthly rental revenue.
Tenants should be able to show they earn at least three times the current monthly rent, regardless of how you verify income.
Income Verification Documents: What Are They and How Do They Work?
When validating an applicant’s income, some landlords consider overtime, bonuses, seasonal pay, and hazard compensation. However, since these earnings are seldom stable, it’s always better to qualify a candidate based on their basic pay, and only utilize variable earnings if they’re on the verge of qualifying.
Stubs of Pay
The employee’s entire name, employer’s name, and contact information are all shown on pay stubs. Pay stubs also reveal how much an employee receives in gross income and how often they get paychecks. Pay stubs, for example, will confirm a tenant’s annual income as well as per-paycheck wages, including any overtime or bonuses.
When screening candidates, pay stubs are the most credible documentation of an employee’s income and should be sought along with a secondary source of income verification.
How to Get Pay Stubs from Applicants
A landlord should seek the applicant’s two most recent pay stubs and explicitly disclose this in the application instructions to screen a renter based on their income. Each pay period, the applicant will have online or hard copy access to their pay stubs.
How to Use Pay Stubs to Verify Income
Check the pay stubs for the amount of money earned every pay period and their total earnings for the year. The majority of W-2 workers are paid on a bi-monthly basis. To calculate their gross monthly earnings, divide their bimonthly per-paycheck earnings by two. Take note of any recurring deductions as well as your net compensation. Because housing costs normally account for one-third of a person’s monthly salary, multiply their monthly income by 33 percent to see whether they can afford your rental.
An example of a typical paycheck is shown below, along with four items to look for when confirming evidence of income.
- Use the name and address of the employer as a contact.
- Name and current address of the employee
- Gross pay during the pay period
- The applicant’s year-to-date (YTD) gross income reflects how much money he or she has made so far this year.
2. Income Tax Returns
For W-2 workers, tax returns may serve as a supporting document, but for self-employed candidates, they can serve as the principal record. Tax returns should be obtained in addition to pay stubs or bank statements. To verify income, you’ll usually need the previous two years’ tax returns.
How to Obtain Tax Returns from Applicants
The landlord is required to request the applicant’s tax returns. The applicant may get a copy of their tax return from the IRS, their accountant, or by downloading it from the internet. Some applicants utilize tax preparation software and can print, email, or submit a PDF version of their tax return using digital files.
How to Use Tax Returns to Verify Income
A potential tenant’s tax returns reveal where they worked in the previous two years as well as their total income. The more tax returns a landlord has, the more financial history he or she may evaluate when choosing a renter.
The landlord may check the applicant’s contact information on an IRS 1040 tax return to make sure it matches what’s on their rental application. Landlords may then look at a potential tenant’s salaries and adjusted gross income to see whether they can pay the rent. Divide gross income by 12 months to obtain monthly income, then multiply by 33 percent to get one-third of their income to meet housing costs.
3. Bank Account Statements
Obtaining supporting documentation for use with pay stubs to verify a tenant’s income is as simple as asking for the applicant’s two most recent monthly bank statements. If an applicant is self-employed, statements may also be used as a supplementary source of income. Landlords should gather tax returns as main documentation if this is the case.
For validating tenant income, bank statements provide various advantages, including the opportunity to see a renter’s whole banking history and examine their cash reserves. Look for rejected checks, overdraft penalties, and a history of missed payments. A bank statement will almost always be considered as a supplementary source of verification of income.
How to Obtain Bank Statements from Applicants
Bank statements are an excellent method to learn about an applicant’s finances, but you must get them from the renter in order to examine them. Asking the applicant to submit a PDF of their most recent statement, which should contain itemized transaction history, including deposits and withdrawals, is the simplest way for the landlord to get them.
How to Use Bank Statements to Verify Income
The landlord should request the applicant’s bank statements for the last two months. The bank’s name, the applicant’s name and address, and the statement date are all visible in this case. You can also check the total amount of deposits and withdrawals. If the applicant supplied the main proof of income document, double-check that the income matches the bank deposits.
- The name and location of the bank may be found on the bank statement.
- Name and address of the applicant, which must match the name and address on their rental application.
- The monthly dates of the statement are shown in the statement periods.
- The applicant’s total deposits and withdrawals are shown in the totals.
4. Employer’s Letter
A letter from an applicant’s employment may be used as evidence of income as well as a recommendation letter. It should not, however, be used in isolation. It should be provided with one or more additional proof-of-income papers, ideally, pay stubs or tax returns if the renter is self-employed.
The company should state how much the candidate gets and how frequently they are paid in the letter. It should be written on firm letterhead, with the company name, address, phone number, and contact person included. It should also say how long the candidate has worked for the organization and what position they now hold.
How to Obtain a Letter from the Employer of an Applicant
A letter from the applicant’s employer verifies the applicant’s present job and verifies the income declarations stated on the application. Many major organizations have templates and can rapidly supply them to applicants, but smaller businesses may have to start from scratch. If that’s the case, be specific about the facts you’ll need to verify the tenant’s income.
Before giving the application’s information to a potential landlord, some firms may need the applicant to sign a release. This release should be included in the rental application so you don’t waste time attempting to acquire tenant signatures.
How to Use an Employer’s Letter to Verify Income
Verify an applicant’s income using a letter from their employer by comparing the income they claim on their application to the income the employer claims they earn, as well as income from pay stubs, bank statements, or tax returns.
Here’s an example of a job application letter. Landlords may cross-reference the information provided by the applicant with what they put on their application.
- Employer’s correspondence
- Name, location, and phone number of the employer
- Contact details for the applicant
- The wages of the applicant and the length of time they’ve been working should match the earnings on their main document.
A letter from an employer contains useful information, but it must be checked since it may simply be copied or falsified. Verify the firm named on an employment letter by doing an internet search. Verify the applicant’s employment and position by calling the employer. Inquire for a character reference. Obtain confirmation of your pay. Employers are not obligated to provide this information, but you may at least request that they confirm the applicant’s current employment, duration of employment, and job title.
Pros & Cons of Accepting a Letter From an Employer
A letter of employment is a valuable source of primary and secondary verification of income, particularly if you phone the company to confirm it. Because most companies are used to dealing with these sorts of inquiries, it’s essential to go the additional mile and double-check the letter’s contents.
5. Profit & Loss Statements
A profit and loss (P&L) statement can demonstrate a self-employed applicant’s proof of income because it shows their business’s earnings and expenses. A P&L statement shouldn’t be accepted alone but should be used as a supporting document with bank statements or tax returns.
How to Get Applicants’ P&L Statement
A tenant can ask their accountant or bookkeeper for their P&L statement or pull it from their records. Alternatively, an applicant can create a new P&L statement specifically to show proof of income for the property they’re trying to rent.
How to Verify Income Using a P&L Statement
A P&L statement is used best with supporting documents or an accountant’s verification. Since a profit and loss statement is harder to verify than a W-2, it’s used as a last resort or as a supporting document. The P&L statement shows how much money the business earns in revenues as well as its profits. It shows whether the owner is taking a draw and how much, or if they’re paid as a W2 employee on the payroll. Compare the P&L to business bank account statements or tax returns to see if the amounts match.
An example of a profit and loss statement is shown below. Examine the firm’s name and contact information, as well as whether or not the corporation is active and in good standing, by contacting the secretary of state’s corporate filings section. Additional corporate information may be found by doing an internet search. If the resident agent listed on the corporate filing differs from the tenant-applicant, contact the resident agent to confirm the applicant is the company owner.
- Name, location, and phone number of the company
- A profit and loss statement shows a company’s financial position throughout the specified time period.
- Shows the overall profit or loss for the specified time period.
Statements of Social Security Benefits
Retirees and handicapped renters receiving Social Security disability payments often utilize a Social Security statement to prove their income. It works best when utilized in conjunction with the applicant’s tax returns or bank statements as a supporting document. Because Social Security or disability income may be insufficient, bank statements should be examined to verify the applicant’s financial situation.
How to Obtain a Statement of Applicants’ Social Security Benefits
The applicant must acquire and provide a Social Security statement to the landlord. A copy of the application may already be in the applicant’s files. If this isn’t the case, they may get a statement by logging into their Social Security account online. They may also seek the statement by calling or visiting a regional office.
How to Use a Social Security Benefits Statement to Verify Income
The information on the Social Security statement may be verified by comparing it to bank statements or tax filings. The benefits statement will indicate how much the applicant earns from Social Security or disability each month, as well as when they will get it. Check to see whether the benefit amounts match those on a secondary document or in your bank account.
A benefit statement for Social Security or Social Security Disability Insurance (SSDI) is shown below. You should look at what form of statement it is and how much monthly and the annual income it contains.
- Social Security Statement Types
- The name and address of the applicant should match the application and bank statement.
- After deductions, monthly income
- The applicant’s salary is received on this day.
The landlord may contact the Social Security office specified on the letter and confirm that the applicant gets the benefits stated in the statement by calling the number given on the letter. Due to confidentiality rules, the office will not be able to confirm this unless the applicant provides their consent.
7. Court-ordered Accord
A signed legal contract between an arbitrator and a party that the court has ordered to pay is known as a court-ordered agreement. Spousal alimony and child support, as well as a payment from a trust or a lawsuit, are the most typical sorts of court-ordered settlements.
Despite the fact that court-ordered agreements are significantly less prevalent than pay stubs, they are nevertheless valid evidence of income. A court-ordered agreement details the applicant’s source of income, as well as the quantity and frequency with which it is received.
How to Obtain a Court-Ordered Agreement from an Applicant
A copy of the court-ordered agreement may already be in the applicant’s files. If they don’t have it, they may receive it from their lawyer or the court clerk’s office where the decision was made. These papers are part of the public record unless they’ve been sealed, so you may be able to check them up yourself at the county clerk’s office.
How to Use a Court-Ordered Agreement to Verify Income
First, determine if the payments are made monthly or in one big amount. Request extra bank statements if it’s a lump sum payment to ensure there’s enough money left to pay the appropriate rent. If the contract calls for a monthly stipend, be sure it’s at least three times the rent.
An example of a court-ordered agreement is shown below. In most cases, you’ll want to double-check the overall amount and the frequency with which it’s paid.
- It demonstrates that the document is a court-ordered agreement.
- The quantity and frequency of your earnings
How to Recognize Fake Income Documents
Landlords must check income to guarantee that renters can afford to rent their homes. Tenants are aware of this and will sometimes submit forged paperwork. Knowing what to look for may save you time, money, and a potential lawsuit by vetting your prospect’s evidence of income.
Here are some pointers on how to recognize phony and fraudulent evidence of income.
1. Trust your instincts.
If the applicant’s income doesn’t seem to line up or you have a gut feeling that something isn’t quite right, trust your instincts. You should reject them as a renter if you have problems validating their statements. If there are problems at the start, they will typically develop worse over time, costing you money in evictions and legal bills.
2. Make tenants sign Form 4506 as a condition of their lease.
With a signed Form 4506, you may seek a transcript from the IRS to verify the information on a profit and loss statement or to authenticate the income of a possible renter. The tenant’s federal tax paperwork will be shown on the transcript. The transcript is the IRS’s formal receipt and recording of income, and it is stamped as such so it cannot be falsified.
3. Compare your pay stub earnings to your year-to-date earnings.
Inquire about the applicant’s two most recent pay stubs. Examine their per-pay-period earnings as well as their year-to-date (YTD) totals. If the pay stub isn’t authentic, the numbers won’t always line up. You should also double-check the pay stub with another source of proof of income.
4. Examine the Current Statement Balance
Check that all deposits are accurately represented in the overall ledger balance to recognize a phony statement. Because the applicant has presumably added deposits and withdrawals that aren’t shown in the running balance, a faked bank statement typically doesn’t include the right continuing balance.
5. Look up a Tenant’s Business on the Internet.
If your candidate is self-employed, look for the firm stated on his or her application online. Check to see whether the firm exists and how long it has been in operation. The same search may be done for candidates who provide W-2s and letters of employment. The secretary of state corporate division, which is an online searchable database, requires most firms to register. Verify that the firm is operational and in good standing and that the owner’s name matches the applicant’s.
Conclusion
A tenant must demonstrate that they can afford to rent your home. This is done when they provide proof of income papers. The landlord verifies these papers to avoid fraud and get a better understanding of their finances, which helps decide their appropriateness as a potential renter.
