Every time you bring on a new tenant, you must follow an extensive list of routine checks— interviews, employment confirmation, proof of income validation, and more.
You want to sign a new tenant right away and start earning your investment back. And sometimes it’s tempting to take shortcuts like skipping the proof of income verification.
It’s an extra step that delays the process.
And the credit check and employment confirmation could make up for it.
Not so fast.
About 84% of landlords worry about their tenant’s ability to pay rent on time and you are probably one of them.
Yes, verified income doesn’t provide any guarantees. But knowing what to look for in the tenant’s income documentation makes the screening process more effective. And it gives you a clearer picture of a tenant’s financial health and cash flow and it could help you catch unqualified tenants.
1. Make sure their income is at least 3x rent
Late rent payments cause financial stress and inconvenience to any landlord. But evictions are even worse.
Average eviction costs range from $3,500 to $10,000 and the average success rate of collecting unpaid debt is only 17%. So you want to avoid evictions whenever possible.
Verifying a tenant’s proof of income helps you evaluate if the potential renter could make regular rent payments. And there’s a rule of thumb that a tenant’s rent should be three times their monthly income amount.
So, if you’re charging a monthly rent of $1,000, income requirement for tenants should be a salary of at least $3,000.
This rule is also consistent with the United States National Housing Act, which defines cost-burdened renters who spend more than 30% of their income on rental payments.
2. Ask for Pay Stubs
A new rental applicant should be ready to provide you with their most recent pay stubs.
These pay stubs could be a physical copy or in a digital format. What's best about asking for a pay stub is the fact that it is
This is the most convenient proof of income for an employed applicant. They should have a digital or physical copy of the pay stub.
Be sure to ask for the applicant’s pay stubs for at least the last three months.
Here’s what you should look for when reviewing pay stubs:
- Company name or logo. Verify if the company name or logo is present.
- Employer name and contact information. Look for the contact information and address of the company online and see if it matches the information on the pay stub.
- Applicant’s information. The name and current addressed on the recent pay stub should match the information on the application submitted to you.
- Income. Pay attention to the current income and total earnings to date. Check if the year to date numbers in one pay stub is consistent with the next one. These errors may happen but could indicate that the pay stub is fake.
- Social security, FICA, FUTA, and other taxes. Compute if deductions in the pay stub are consistent with the stated income.
Bonus Tip: If the applicant is an hourly worker, request as many stubs as you need to get a clearer picture of the applicant’s average earnings. Always count missing pay stubs as zero income.
Look out for overtime pay listed on the pay stub since the applicant’s total earnings may appear higher.
3. Confirm Applicant’s Reported Salary with an Employment Verification Request
Pay stubs are not enough. You still need to verify the accuracy of these documents, and you can do this in two ways—through a phone call or an a verification letter.
employment verification letter.
It’s rare for employers to divulge income-related information over the phone. But they may provide info about the applicant’s employment status and tenure.
Most employers expect to receive requests for employee information through an employment and income verification letter signed by the employee. This letter may serve as employment confirmation and proof of income.
Bigger companies often have a templated letter providing employee verification, but smaller companies may not. At a minimum, income verification letters should include:
- Company letterhead.
- Name, address, and contact information of the employee. This should match the name and contact information on the application form.
- Length of Employment.
- Job Title.
- Total Income. Income indicated in the income verification letter should be the same or close to the total reflected on the applicant's pay stubs.
Don’t rely on the contact number provided in the employment or income verification letter. Forged verification letters may list the applicant's friend or relative as the contact person.Look out for forged verification requests. Research the employer and call the contact number on the company’s website.
Some tenants prefer using employment verification letters as proof of income since it reveals less personal information than bank statements.
4. Check if Pay Stubs Match Bank Statements
Bank statements may serve as secondary proof income for employees who work in small companies and self-employed individuals.
In the U.S. only 6.5% or about 8.4 million people have no savings or checking accounts. So, it’s rare for an applicant not to have a bank statement although not everyone would use it as proof of income.
The main proof of income would be the tax return. And to support reported income, the applicant should provide a bank statement at least for the last two months.
Bank statements provide a clearer picture of the applicant’s cash flows.
What to look for in bank statements:
- Name of bank and address. This should be an existing establishment and verify the address.
- Account holder’s name. The applicant’s name on the application form should be the same with the name on the bank statement.
- Deposits. The bank statement needs to show consistent deposits to show that the applicant receives enough income to pay the rent.
- Cash reserves. There should be three to six months of cash reserves in the account. Renters with emergency funds have something to fall back on if the business goes bad or if they lose or leave their job.
Look out for transfers between accounts. These transfers could create an illusion that the renter has consistent cash flow when there’s none.
5. Cross Check Pay Stubs and Bank Statements with Tax Returns
Pay stubs and bank statements are both valid proof of income but it’s better to ask for additional information. And the tenant’s tax return for the last two to three years could provide more clarity.
Both employed and self-employed applicants should have access to their tax returns. Applicants can request a copy of their return or a tax transcript from the IRS.
Acceptable tax returns include:
- W-2 for employees
- Form 1040 for sole proprietors
- 1099 form for self-employed
- Form 1099-R for pensioners
What to look for in a tax return:
- Name and address. This should match the information on the rental application.
- Company name. Run an online search to verify the company listed on the tax return. If there are any red flags, ask for additional information or decline the tenant’s application.
- Income. This amount should also coincide with the information on the employees' pay stub.
Applicants are less likely to forge a tax return, and their income on the return should be reliable. Unfortunately, tax returns may not show the real income of some tenants. Sometimes, tax returns don’t capture bonuses and additional income from side hustles.
Raises and earnings for the current year will not be reflected in the tax return either.
6. Confirm Social Security Benefits Statements
Social Security Benefits Statements could serve as proof of income for some tenants. Retirees receive consistent income every month. And these guaranteed payments are less volatile.
What to look for in Social Security Benefits statements:
- Beneficiary name. This should coincide with the name on the rental application.
- Monthly income. Total income from Social Security Benefits should be enough to cover rent payments.
- Pay Date. Check when the tenant receives the money so you can consider this for setting rental payment deadlines.
The applicant may have a copy of the Social Security Benefits Statement on file. But they can also request one from their Social Security account or in person in one of the regional offices.
Like employers, administering officers need the applicant’s authorization before releasing any information about them. And try to secure an income verification letter from the tenant.
7. Be Extra Careful When Reviewing Alternative Income Streams
At some point, you may have tenants who have alternative sources of income. Others may get paid in cash and they have no active bank accounts. Some rental applicants may only have an offer letter from a new employer.
What to look for in alternative income sources:
- Name and address of the administrator. Use official channels to verify the information submitted as proof of income.
- Name and address on verification letter. This should be the same as the information on the rental application.
- Earnings, frequency, and applicable period. The verification letter should state the amount the applicant will receive and how often. Court-agreed settlement payments may end at a certain time. You need to check if the payments will end after the lease term.
- Conditions to receive income. Sometimes, receiving income depends on certain conditions. An offer letter, for instance, may indicate that the applicant needs to pass drug tests and medical exams before getting hired. Take note of these conditions and assess the risk.
Always request a benefit verification letter for applicants with subsidies. Sometimes, tenants declare incorrect information, not because of fraud but by mistake.
If any rental applicant receives public assistance or receives welfare benefits, you may need to recompute the required income.
Let’s say your rental payment is $1,000 and you’re receiving monthly assistance of $700. Your required income (three times the rent) should have been $3,000.
After factoring in the $700 assistance ($1,000 less $700), the rent becomes $300 a month and the tenant’s required income decreases to $900.
When dealing with applicants receiving public assistance and compensation from court-agreed agreements, look out for possible violations against the Fair Housing Act.
In the US, 18 states—Connecticut, California, District of Columbia, Delaware, Maine, Massachusetts, Maryland, Minnesota, New York, New Jersey, North Dakota, Oregon, Utah, Vermont, Virginia, Oklahoma, Washington, and Wisconsin—have source of income discrimination laws.
And it doesn’t end there.
Some cities and counties may also have a source of income discrimination policies.
For instance, Colorado is not on the list above, but Denver has a local ordinance against the source of income discrimination.
Devise an Effective Tenant Screening System That Complies with the Fair Housing Act
The average landlord screens 2 applicants for each rental property. If this statistic holds true for you, you shouldn't have to validate tons of income documents for your rental units.
As the landlord, you can reject applicants who can’t afford the rent or produce proof of income, but do so in a respectful manner. Send a rejection letter along with the reasons for turning down the application.
Always document the whole tenant screening process and keep your records for at least 7 years.
Bonus Tip: Create a policy for screening tenants and use the same criteria to screen all applicants to be compliant with the Fair Housing Act. When in doubt consult a real estate lawyer to assess your tenant screening practices.
Your tenant screening process should help you achieve your goal of finding the right tenant.
And to make that happen, you need to request proof of income and validate its contents even if it takes several phone calls to get the information you need.
An effective tenant screening process is not only your first line of defense against discrimination lawsuits, but it should also help you find reliable and responsible tenants.
Now it’s your turn.
Which one of these verification tips will you try using first?