Income Verification
Income Verification
Verifying that the applicant has adequate income with which to pay rent is near the top of the list of screening items for many landlords. There are many sources of income with wage earnings being the most common. Other possible sources of income include self employment, stocks and bonds, trust funds, mutual funds, spousal or child support, government assistance, and income from rental properties.
In recent years it has become ever more difficult to get employment information from employers because of the fear of lawsuits. Some employers will not even admit over the phone to knowing their own employee. Others will not give out any information without written authorization from the employee and will only respond to a written request, sometimes requiring that it be on the employer’s own form. Employers may be unwilling to respond via phone, fax, or email.
The best approach is to have a separate and specific release form for employment verification (dates of employment and wage amounts) signed by the applicant employee and mailed or faxed by the landlord to the appropriate employment department, with verification that it is valid destination.
It is, of course, important that the form be returned directly from the employer rather than passing through the hands of the applicant if possible. If it does pass through the applicant’s hands, you will need to verify the legitimacy of the returned form.
When one runs into such obstacles to obtaining employment information one option is to leave the burden of verification up to the applicant and only require that the employer mail it or fax it to you or that the applicant authorize the employer to respond to your phone call to a phone number which can be verified as legitimate.
As a landlord, you want to determine whether or not the applicant has sufficient income to afford the rental property, but this can usually be accomplished by means other than verification by employers. In general, a landlord can request whatever financial information is desired in order to confirm the applicant’s ability to pay under whatever legal, reasonable, and logical criteria the landlord uses, so long as the same requirements are demanded of all applicants.
In view of the ease with which any document can be produced on home computers, one must always be concerned about authenticity of any documents provided by applicants themselves.
Employment and income documentation should consist of requiring the applicant to produce the last several paycheck stubs. Relying on the most recent year’s W-2 provides no certain information regarding current income since a W-2 is always old information and provides no proof that the applicant has had a job during recent months, although it can be useful as additional verification if authenticity of other items is questionable.
Pay stubs are useful for confirming current employment and amount of income, if not otherwise confirmed, and sometimes even to verify the applicant’s Social Security number. However, considering the ease of generating any counterfeit document on a personal computer, pay stubs should not be the sole documentation. In any event, review the pay stubs to verify that the applicant’s name, address and Social Security number are the same as shown on the application and, if not, determine the reason for the fact. The pay stub may also show the pay period, monthly, bi-weekly, or weekly. Make copies of the stubs and/or any other documentation utilized.
Self employed individuals can be asked to provide copies of their tax returns, preferably at least two years worth, to reduce the impact of a business that has large swings in annual income. Last year’s Form 1099s mean little, as it is net profit shown on the Schedule C rather than gross revenues that counts when judging whether or not the applicant can afford the rent, except, again, that they can be useful for verification of gross income. However, you must remember that
self-employed individuals often do not receive Form1099s for all gross income and, in fact the amount of income provable by 1099s can be very low. The percentage of gross income represented by 1099s varies with type of business
whether the clients/customers are aware of and follow IRS rules related to reporting payments with 1099s. In other words, the total of Form 1099s is a minimum gross income and may be substantially less than actual gross income.
Finally, gross income may be indicative of an applicant’s ability to pay rent or may mean nothing.
Also keep in mind that the most recent tax return will usually not be providing current information, as depending on the time of year, possibly as much as about 15 months old. However, as mentioned earlier, the bigger problem is that, with
today’s computer software, it is possible to generate a tax return within minutes that is in no related to the one filed with the IRS. Accordingly, for applicants whose tax returns are prepared by a CPA or other professional preparer, it if best to require that the preparer provide the tax returns and that you have the right to speak with the preparer after receiving the returns.
It is possible to obtain a copy of an applicant’s Form 1040, as well as attached forms and schedules, directly from the IRS with the permission of the applicant. However, considering the time required to do so, typical screening and selection process time would not usually allow doing so. Additionally, the cost of the copies, particularly if multiple forms and schedules are necessary, may be prohibitive.
Although wage earnings is probably the most common source of income, with self-employment income perhaps being next, there are numerous other possible sources of income. Other sources include interest, income from stocks and bonds or mutual funds and other investment vehicles, regular payments from trust funds, spousal or child support, disability payments, government assistance, retirement programs, retirement income including Social Security and both private and government pensions, and income from rental properties.
If another source of income will be used for rent payment, verifiable documents, appropriate to the source of income, should be requested. Verification of such income must be considered on a case-by-case basis. Most non-earned income is relatively easily verified because the recipients are provided statements showing the amounts, although, again, verification of validity must be considered.
Your procedures can also address the issue of cash-only workers. Cash income presents problems because most cash employers will be unwilling to furnish documentation of employment and cash payments. If a cash-only worker thinks he/she can provide adequate documentation of income and the likelihood of steady future income, you may wish to accept an application. While you cannot arbitrarily discriminate, you can enforce your policy requirement of legitimate, adequate documentation of source of funds for rental payments.
When possible, it is usually best to consider multiple documents that together confirm what the applicant puts on the application form. Documentation related to verifying income should be copied and retained because it might be useful in case of the need to collect a judgment later obtained against the tenant. However, as for all personal information regarding applicants and tenants, care must be taken to safeguard the information while retained and documentation must be properly disposed of when no longer of possible value.
Finally, keep in mind that a good credit record, absence of an eviction record or a relevant criminal record, and a satisfactory report from previous landlords are usually more important than the details of employment. Many tenants pay their rent on time and take good care of rental property with very minimal income, while many others fail to pay rent and/or trash properties in spite of substantial incomes.