Employment & Income Verifications
An applicant for an available rental unit must prove he/she can meet rent terms and conditions. To do so, the applicant must submit documentation of current employment and proof of income at time of application.
A rental information packet that details the landlord’s rental policies and procedures including income standards can be helpful to prospective applicants to quickly determine if their income will qualify to stated requirements.
Verifying an adequate source of income that the applicant will use to pay rent is important to determine whether the applicant has the financial ability from a stable income sufficient to pay timely rent for the term of the lease. It is a good practice to verify the applicant’s employment and income early in the tenant screening process. If the applicant cannot qualify under the landlord’s financial criteria, there is no need to proceed with other screening reports.
Verification of an applicant’s financial ability to pay rent is a part of the landlord’s responsibility of duty of care to protect his property and his tenants. Some potential tenants overestimate their ability and means to pay rent in a timely manner. A landlord cannot afford to accept at face value the income amount the applicant enters on the application form. Verification begins with independent confirmation of the applicant’s employment and amount of income.
In general, a landlord can request whatever financial information is required to confirm the applicant’s ability to pay under the landlord’s legal, business supported rental criteria, provided the same requirements are demanded of all applicants. For rental housing, the most common income qualification standard is a 3:1 ratio of gross monthly income to monthly rent.
There are many sources of income that may be used for rent payments. Wage earnings are the most common type of source of income and can be easily verified by a landlord. Non-employment income must be considered on a case-by-case basis with a verifiable documentation, appropriate to the source or sources of income, such as an official statement of receipted funds and statement balances. A good business practice to verify income is to require a primary source document and a secondary supporting document for the type of income that the applicant will use as the source for rent.
As the first step in the verification process, a landlord should request appropriate documentation regarding the applicant’s income.
W-2 Employment
Proof of current employment and wages or salary income for applicants can be verified by (1) the applicant providing copies of the last several paycheck stubs, and (2) the landlord’s direct confirmation of the applicant’s employment status by the employer either in a written document or as documented in a telephone conversation. A landlord may request a copy of the applicant’s previous year W-2 income statement for comparison of last year earnings to projected earnings for the current year. In certain circumstances a landlord may request a copy of the applicant’s filed tax return for the previous year.
As should be stated in the rental information packet offered to rental prospects, applicants should be prepared to provide copies of paycheck stubs, the W-2 form, and authorize consent to their employer to release an employment verification letter to the landlord.
A letter from an applicant’s employer can serve as proof of income and as a letter of reference for the applicant. The confirmation of employment information in the letter should agree with employment information given on the application including employer name and address, applicant name and current address, the applicant’s job title or job position, length of employment, and as permissible, wage hourly rate, standard work schedule or confirmation of a salaried position.
The base rate of pay and scheduled hours per pay period should be used for income qualification. Overtime hours and/or bonus pay should not be used in determining annualized income due to variances in amounts and frequency that are not control by the applicant.
Self-Employment
A 1099- Miscellaneous Income Form (1099-M) is used to report earnings of individuals who are self-employed. While it may be of benefit to the landlord to request copies of the applicant’s 1099-M forms, a landlord must keep in mind Form 1099 reporting requirements. A 1099 does not need to be prepared if the amount of payment is less than $600 for the year. A self-employed individual has the obligation to report all self-employment income on his tax return but may not receive a 1099-M form from all employing entities and individuals. A landlord instead can request the applicant provide copies of the previous two years filed tax returns to document his income. A landlord could also request copies of the applicant’s bank statement as a supporting document to show recorded transactions of income deposits.
Commission/Bonus/Incentive Based Employment
An applicant whose income comes from commissions or incentives will need to provide the landlord with copies of appropriate documents that support the source of income. A landlord may need to review copies of tax returns, bank statements, 1099s, or other supporting documents.
Other Sources of Income
Verification of non-earned income, such as interest, dividends, annuities, Social Security or disability benefits, IRA/401(k) pension distributions, other retirement plan distributions, court-ordered agreements for spousal support, child support or as awarded by lawsuits, and other investment cash flow and entitlement items, may be verified through copies of official statements provided to the applicant.
Although not commonly used as sources of income for rents, an applicant may plan to use funds from a Workman’s Compensation award, severance payment from an employer, or state Unemployment Benefits. A landlord should carefully analyze documentation provided by an applicant regarding the use of these types of funds. Oftentimes the benefit award period is a short duration or a lump sum amount was awarded. Additional verifications may be needed to determine particulars of awarded benefits and the balance of funds remaining in account that can be distributed.
Cash
In some circumstances, a cash economy is a generally accepted means of payment for a variety of goods and services. Accepting cash for rent payments may not be in the landlord’s best interests for many reasons. A landlord should be cautious in qualifying a prospective tenant who wants to pay his rent in cash. Cash only employment may present problems because most cash employers may not be willing to furnish documentation of employment and proof of cash payments. If a cash-only worker can provide adequate documentation of his cash earnings – e.g., tax returns that were most recently filed – and a written statement from his employer of the likelihood of steady future income on a cash basis, a landlord may choose to conditionally accept the applicant’s source of income and continue further tenant screening.
Verifications
As discussed above, paycheck stubs, W-2 income statements, Form 1099-M, and the employment verification letter can serve as verification instruments to document employment income sources.
Bank Statements
A landlord may request copies of the applicant’ bank statements for a specified number of months, usually three to six months, to establish an income history. Bank statements can be supporting documents to confirm paycheck and other income deposits, determine cash reserves, view itemized transaction history including bank overdrafts and returned items, and view account balances.
Tax Documents
The federal income tax Form 1040 can be a supporting document for proof of income from taxable sources. In some circumstances, a tax return may be the only way to prove verifiable income. If tax returns are requested by the landlord, it is suggested that the previous two years of tax returns be provided by the applicant.
The forms W-2 and 1099-M are tax reporting documents that can be used in lieu of tax returns because the forms document year-end income information.
Additional Considerations
When qualifying an applicant’s income, verifying source of funds, and confirming employment, a landlord should closely inspect the applicant’s verification documents to make sure the name and address shown on a document match the applicant name and address on the application form and as verified with identity documents presented at time of application.
A landlord must also take into consideration housing costs related to the subject rental unit in addition to the rent, as well as other monthly debt obligations seen from the credit report for the applicant, as large income is sometimes offset by large required debt payments and the net of the two must be what is considered when determining an applicant’s financial qualification.
By conducting appropriate due diligence in verifying that an applicant meets income requirements a landlord can avoid installing a tenant who cannot meet his rent obligations and potentially must be evicted from the rental property.