The tenant screening process and verifying proof of income is one of the most challenging parts of a landlord’s job. It requires a considerable amount of time and effort for each applicant. The investment is so significant because the task is so important.
Landlords are in the unique position to ask applicants about their financial status without breaking any rules. It is a requirement to ensure the applicant can afford the rent and expenses of living in the home. Applicants must show valid proof of income for consideration as a tenant. Most landlords ask for more than one source to ensure that what the applicant reported is accurate and protect against fraudulent documents.
Landlords can verify income manually or through a tenant screening service. Doing so manually is a more tedious/time-consuming choice but can be cheaper. Using a screening service provides additional information such as background checks, employment and rental histories, and credit score, but such providers charge a fee for the service. This guide will explain the type of documents acceptable as proof of income and how you can use them to find the best tenants available in your area.
Proof of Income Documents
Proof of income documents shows how much income a person receives and how often they receive it. A landlord has no verifiable way to ensure the applicant can pay rent without this information. A few things to keep in mind:
- Applicants should always provide at least two verifiable forms of proof of income to give landlords a basis for comparison and an extra verification line.
- There are many ways to get paid and to show proof of payment. Freelancers, retirees, and the self-employed receive income differently than most people.
- It is critical to ensure that the proof they submit is as reliable and accurate as applicants who are full- and part-time employees using W-2s.
Accurate verification is vital to the tenant screening process. Verifying proof of income documents is a daunting task if performed manually. It is easy to miscalculate or overlook an important detail. Tenant screening services are a more accessible option for all the work and provide more critical information than manual checks.
Acceptable Proof of Income Documents
The best documents are those that are easily verifiable by a credible source. Employers, financial institutes, and the government are considered credible sources. Any document used should have dates of pay, income amounts, and revenue sources listed. There are several common, reliable forms applicants should be able to present immediately.
Paycheck Stubs
Paycheck stubs are the most reliable proof of income available. They provide the applicant’s name, employer’s name, gross income, and how often payment occurs. You can also find helpful information such as year-to-date income, overtime, and bonuses. These extra pieces of information provide a more comprehensive view of the applicant’s financial status. Landlords should always ask for at least two of the applicant’s most recent pay stubs.
Bank Statements
An applicant’s two most recent bank statements are reliable but should accompany pay stubs and at least one other verifiable document. Bank statements provide the applicants personal information as well as amounts and dates of deposits. Landlords must cipher which deposits count toward the applicant’s revenue. Self-employed individuals, who don’t have pay stubs, must often supply a bank statement for their primary proof of income.
Tax Returns, 1099s, and W-2s
Two recent years of tax returns provide reliable income information for both W2 employees and the self-employed. Tax Form 1040 includes information on all the applicant’s income streams throughout the year. Tax returns are reliable but should only be used as a supporting document to pay stubs and bank statements. Keep in mind that tax returns do not provide information on current employment or income. Companies fill out W-2 forms for all of their employees. They report total wages paid and help fill out a more detailed picture of the applicant’s financial abilities.
Form 1099 MISC is a report of an applicant’s income that’s outside the normal stream. Those who are self-employed and independent contractors use it. It is also helpful in declaring income from royalties or assets such as with an author or a trust fundholder.
Proof of Income Letter
Employers sometimes provide proof of income letters for their employees that state the applicant’s role in the company, amount of pay, and dates employed. A valid letter should be on company letterhead with business information and a contact person. These letters also serve as letters of recommendation in some cases. They can be helpful but should always be used in conjunction with another verifiable document.
Statement of Social Security Benefits
The Social Security Administration provides benefit verification letters for recipients. It details the monthly benefits received and provides an easy form of proof of income for retirees and older adults applying for housing. Social Security benefits are generally low. These verification letters are used only as supplementary income in most cases. Check the applicant’s tax returns and W-2 to ensure they can financially retain the rental costs.
Workers’ Compensation Letter
Employees who are hurt on the job can receive workers’ compensation. It’s a set of benefits that provides medical allowances and lost wages to compensate for the injury. A letter detailing this income is verifiable, but these benefits run out after a specified period. Be aware that this stream of income will not always be available to the applicant.
Court-Ordered Agreement
Court-ordered agreements verify streams of income such as alimony and child support. A payout from a lawsuit or a trust is also verifiable by this means. These agreements reveal the source, amount, and frequency of the applicant’s payments. They are a much less common but still reliable tool to verify revenue.
Profit and Loss Statement
Profit and loss statements show just that, a business’s profits and losses throughout a year. It’s most often used to acquire financing for a company but serves well as a supporting document for proof of income. Always use a profit and loss statement in addition to other documents. It is not a reliable form of proof of income on its own.
Unemployment Compensation Letter
People who are laid off from their jobs can receive unemployment benefits. They are intended to be a living wage to suffice until the person finds a new job. They do not last indeterminately. An applicant may submit an unemployment compensation letter. The landlord should, however, ensure the applicant has a new job in place before their benefits run out.
Annuity Statement
Annuity payments come from insurance companies. Payments are set up by the insurance company when a person wins a settlement against them. An annuity statement tells a landlord how much the payments are and how often they come. It can be used as the primary income if the settlement is large enough.
Interest and Dividends
Interest and dividends from investments can make up a person’s entire income. They are found on tax form 1040. Combine this verification with bank statements and tax returns to confirm the authenticity and provide a whole financial picture.
Severance Statement
Sometimes an employer pays a severance package to an employee when they leave their position. It can be a considerable amount, in some cases, enough to qualify as an income. A severance letter tells a landlord how much the payments are when they come and how long they will last.
Many people who work in unconventional ways still make great tenants. It’s up to the landlord to decide which forms are best suited for the situation. Obtaining the documents is only half the battle. You also have to compare and verify them.
How to Verify Proof of Income Documents
Verifying income means ensuring all the information is accurate. It isn’t uncommon for applicants to falsify income information. There are two common ways to verify income information from an applicant.
1. Manual Verification
Landlords can manually check information from applicants by requesting the required documents and calling employers, government agencies, and other sources. They must check each document for accurate payment dates, amounts, and frequencies. This verification method requires a complex filing system to maintain the vast amount of paperwork, phone call records, and information gathered on each applicant. It can be even more comprehensive if there is a co-applicant or co-signer on the lease. This method is a labor-intensive portion of the tenant screening process. Some landlords choose this option to save money or because they prefer to do the legwork.
2. Tenant Screening Services
Landlords have myriad responsibilities, and tenant screening is only one of them. They may not have all the skills, time, or experience needed to perform every duty. Tenant screening software smooths the application process for property managers and applicants by verifying income, running background checks, and authenticating dates and amounts. This software is a valuable tool for landlords that can fit into almost any size budget plan.
The way you verify proof of income depends solely on preference and what works best for the property. One thing is certain, though, confirming income is a necessary task for all applicants that also presents a set of unique obstacles to overcome.
What to Look Out For When Verifying Proof of Income
Proof of income is vital for a landlord but getting accurate information can prove challenging. There are also downsides to certain documents that can delay the screening process. They won’t cause any massive disasters, but there are a few things to look out for when verifying income documents.
Fraudulent Documents
Not every tenant is honest. Landlords will undoubtedly deal with more than one applicant who submits forged or fraudulent documents with a rental application. Spotting fake documents has become more demanding as technology has improved. The best way to catch a phony copy is to be diligent in the verification process. Make sure all the numbers add up and are in the correct places on all documents. Another easy way to catch fake paperwork is to use tenant screening software.
Employee Rights
One problem landlord’s who manually verify proof of income run into is employers who don’t verify employee information over the phone. Some employers refuse to release employee information to landlords without a signed consent form from the employee.
Time Constraints
It is impossible to comprehend the amount of time it takes to go through a bank statement or tax return line by line to ensure authenticity and proof of income until you sit down to do it. Fake documents are usually loaded with imaginary deposits. Authentic documents can have many transactions that may or may not be verifiable income. You can’t discern any of it without deep investigation, and that takes time.
Overtime, Bonuses, and Commissions
Any extra income earned outside of the standard pay period, like overtime and bonuses, can make applicants appear as if they are in a higher income bracket if not calculated correctly. Always check and double-check figures when verifying income manually.
These aspects of the verification process are frustrating, but not paying attention to these areas can derail the whole process and cost you some cash in the meantime. It’s always best to remain vigilant in your verification process. When you don’t have time to do it on your own, use a tenant screening platform.
Help from a Tenant Screening Expert
Authenticating proof of income is a tiresome necessitate of the tenant screening process, but we can streamline it. Rent Safe is a digital service that helps renters easily submit their rental applications and landlords simplify the screening process.
Our software offers a customizable dashboard and real-time results to offer the most user-friendly experience possible. Contact the Rent Safe team to see how our platform can help simplify your rental applicant screening processes.
