When it comes to renting out a property to another party, there will always be a certain amount of risk involved. In one way, landlords can mitigate this risk by requesting proof of income.
Why Is Proof of Income Important?
Proof of income is a document verifying that an individual or household receives regular wages. This shows the landlord that a prospective renter has and will continue to earn enough money to make monthly payments. By receiving legitimate proof of income, landlords better protect themselves from scams and renters who could become unable to meet property payments.
When screening rental applicants, property owners can verify a potential renter’s ability to cover expenses in a number of ways. One standard proof of income is a letter written by the applicant or an accountant, social worker, or employer on the applicant’s behalf. Including information like the prospective renter’s hourly wage and average weekly hours, a letter like this can help a landlord assess the likelihood that the applicant will consistently meet rent payments. In place of or in addition to a letter, landlords can also request financial, court, or employer documents to verify proof of income.
A rental applicant’s employment status and sources of income will determine their feasible proof of income documents. To get the data needed to make an informed decision, solicit proof of income that meets your needs and the financial situation of the applicant.
10 Ways Renters Can Show Proof of Income
There are a number of ways renters can show proof of income. These include the following documents:
1. Pay Stubs
A landlord can use an applicant’s pay stubs to assess their gross salary as well as factors like how often an applicant receives payment and how much their income varies throughout the year. When using this method to gather this information, ask for a few months’ worth of pay stubs.
2. W-2
This form shows the previous year’s declared income. A landlord can use this document to determine if an applicant has received consistent wages.
3. 1099 Form
If a rental applicant is self-employed, a 1099 form provides the same general information as a W-2. Request this form from self-employed renters to see their income and previous year’s taxes.
4. 1099-R
Also known as a pension distribution statement, a 1099-R form documents a senior’s retirement benefits, including any annuities or retirement plan. Retired rental applicants will have this form in their tax returns.
5. Social Security Statement
If a rental applicant is retired, a Social Security statement can provide proof of income. Adding this to your list of accepted forms can accommodate an increasing number of senior renters.
5. Court-Ordered Award Letter
If an applying renter receives payments such as child support or alimony from a former partner, these payments count as income. Renters can request a document of the agreement or a court-awarded letter from the court.
6. Tax Return
The most useful part of a tax return to a landlord is the 1040 form. This form documents all of a renter’s income sources and can show a landlord if the rental applicant earns their money or receives it from non-work-related endeavors.
8. Bank Statements
If, for any reason, an applicant doesn’t have pay stubs, a bank statement can be a suitable substitution. Landlords typically permit self-employed applicants to provide a bank statement as proof of income since self-employed individuals don’t receive pay stubs.
9. Workers’ Compensation Letter
Potential renters who have recently suffered injuries can supply proof of workers’ compensation with a letter. Qualifying applicants can obtain this document from the court or insurance company responsible for their case.
10. A Letter From an Employer
Contacting an applicant’s employer can make it easy to verify employment, salary, and any other information you may need in order to approve their application. A letter from an employer, with a real person behind the signature, can be a great way to assuage any worries about an applicant’s trustworthiness.
Four Ways to Confirm Proof of Income
After you’ve received proof of income, you’ll want to verify its legitimacy. This can be done by:
- Checking the numbers: If you suspect a renter has forged their proof of income, mismatched documents might give them away. Ask to see the applicant’s last two pay stubs. If the year-to-date (YTD) and per-pay-period amounts don’t match, it’s likely someone faked the documents. You can do this against a different proof of income as well.
- Searching an applicant’s business: States or even counties often require businesses to register themselves. For this reason, landlords can easily check the validity of W-2s and letters of employment by checking the state’s corporate division database for the business the applicant has claimed. You’ll especially want to do this if an applicant presents themselves as self-employed.
- Cross-checking a bank statement: Often fake statements may fail to account for one or more deposits or withdrawals in the ledger’s running balance. Cross-check the two to verify the statement is real.
- Request an income transcript and signed Form 4506: This form from the IRS accompanies a transcript of the renter’s official income and can prove a document’s validity if it comes into question. Because the transcript comes stamped by the IRS, it’s not easily forged.
Other Ways to Mitigate Risk
On top of asking rental applicants to provide proof of income, some landlords strive to minimize risk by requiring a security deposit of first and last month’s rent upfront. This can help to insure a landlord in the case a renter becomes unable to afford a property. Hopefully, the time purchased by the security deposit gives the renter enough time to find a new place to stay.
Always remember to trust your instinct. If an applicant cannot supply proof of income, you can choose to trust the renter anyway or decline the application. Ultimately, you have the final say in who you feel comfortable renting your property to. If something doesn’t feel right, it’s okay to request further information. Check out the Fair Housing Act for regulations on declining renters.
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