What proof of income documents should you request from prospective tenants? Are bank statements and pay stubs both sufficient documentation? As a property manager, working out the documentation requirements for lease approval is an important component of selecting the right tenant.

In this article, we’ll go through the proof of income documents you should require, including when to request income documentation and the best documents for income verification.

What is Proof or Prove of Income?

Proof of income is a verification process that matches an applicant’s income with supporting documentation. Prospective tenants provide proof of income documents to show that they have the financial stability to meet their rent payment obligations. As a property manager, you may also request income documents to:

• Assess Affordability – Property managers will use income verification to determine if the person’s income is enough to afford rent.
• Verify Source – Verifying the source of income is important to confirm that the funds come from a legitimate source and are not from money laundering.
• Comply with AML and KYC Regulations – Regulated entities are required to meet with AML and KYC regulations, which are required for high-risk businesses and financial institutions to comply with the Bank Secrecy Act to prevent and uncover money laundering.
• Protect Investments – Tenants without stable and verifiable income can increase the risk of non-payments and rental property abuse. Property managers want to protect the owner’s investments by selecting tenants with a high likelihood of paying rent on time.

Proof of income documents are an essential component of vetting tenants; however, property managers need to verify income within the realms of the Fair Housing Act. We’ll touch more on this in a later section.

What Documents are Used to Verify Income Details?

There are different ways that tenants can provide proof of income. Let’s go through common income proof documentation and what to look for as a property manager.

Pay Stubs

Renters with a full-time or part-time job will receive regular pay stubs. The period regular pay stubs cover will depend on the place of employment. Common frequencies are weekly, bi-weekly, semi-monthly, and monthly. Recent pay stubs may also include the renters’ job title, which can help you verify their position in the company.

When reviewing pay stubs, you want to look at the pay period end date, gross income, net pay or net salary, and any other deductions, like health insurance, child support, or taxes. To verify that the pay stub is accurate and not fraudulent, you may choose to contact the renter's employer to verify their employment status and the pay stub amounts.

W-2

A W-2 is an annual tax form that shows how much part-time or full-time employees made during the calendar year. This document is used to file taxes and lists the gross income earned and the different taxes paid, such as federal taxes, Medicare taxes, Social Security taxes, and state withholding taxes. While you might not use the tax portion, you will need to evaluate the gross income.

An employer will issue this form in January following the end of the year. Requesting a W-2 is beneficial to verify that the renter’s declared income matches their tax returns and recent pay stubs. If the W-2 income in the previous year is widely different from the annualized pay stub the renter provided, you may need to ask for other documents and income proof.

Tax Returns

Tax returns are one of the best indicators of a renter’s current income because they highlight their income history, miscellaneous income received during the year, unearned income, and business income. Tax filings, such as Form 1040, are difficult to manipulate because of close regulation by government agencies. Requesting recent tax returns will also be important if the renter has self-employment income. However, tax returns contain important information about both business and regular income.

1099 Form

Self-employed individuals will often receive a 1099. A 1099 for self-employed individuals is the equivalent of a W-2 for full-time employees. If you are requesting proof of income for a self-employed renter, a 1099 will be an indispensable component. However, it’s important to keep in mind that some self-employed individuals will not receive 1099s depending on the type of product or service they offer or their business structure.

Bank Statements

In situations where self-employment income isn’t reported on a 1099, you can request a renter to provide proof of income through bank statement deposits. A business bank account, or a personal account in some situations, will show income deposits for the month. This can be used to verify that the income the renter listed is true.

Financial Statements

Income verification for self-employed renters might also include a review of business financial statements. A profit and loss statement is a financial statement that shows the income and expenses of a business for a specific period of time, such as one month or one year. Some property managers will also require that a CPA sign off on the profit and loss statement as accurate, adding another layer of protection to prevent fraud.

Employment Letters

One of the questions to ask potential renters is for a reference or the contact information of their employer. This information can be used to ensure that the income the renter listed is accurate. In many cases, a written statement or income letter that the employer signs is sufficient as income proof.

Social Security Benefits Statement

One of the main sources of income for retirees is Social Security benefits. If your prospective renter receives Social Security payments, ask for a recent benefits statement. Similarly, you can request an SSA-1099, which shows the annual payments from the prior year. The amounts listed on SSA-1099 tax forms can be verified on past tax returns.

Other Document Types

Other proof of income documents depend on the situation. For example, if a renter is temporarily injured, they may be receiving workers' compensation or unemployment benefits. Similarly, if you are considering renting to a divorcee or single parent, they may be receiving alimony or child support. This income is important to qualify for the monthly rent, which is why it can be helpful to have the renter list all income sources on their application. With this list in hand, you can then request specific documents to verify the amounts.

What is the Best Document for Proof of Income?

The most common proof of income documents are pay stubs, tax forms, and bank statements. For self-employed applicants, you should request 1099s and bank statements. For regular wage employees, you should request recent pay stubs. Other common proof of income documents will depend on the situation, such as whether the applicant has unemployment benefits or child support.

While prospective tenants do submit a self-attestation that the income listed is accurate, it’s important to follow up with supporting documents. Using online tenant screening can help make the entire tenant experience positive and save you time from tracking down multiple files of documents.

What Requires Proof of Income?

Property managers should request income proof for every application. Since the goal of proof of income is to determine that the renter can afford the monthly rent, all income sources used to qualify should have attached documents. However, the specifics of the proof of income documents you require will be at your discretion.

For example, let’s say that rent is $1,000 and the renter needs $3,000 of monthly income to qualify. The renter receives payments from a standard full-time job, investment income, and self-employment income. You should request proof of income for at least $3,000. If the renter’s standard full-time job provides enough income to cover the minimum income requirement, you may not need to request documents for the investment income or self-employment income.

It's also important to note that income payments should be verified for everyone on the lease or contributing to the monthly rent amount, including a family member. Property managers should verify that everyone on the lease has the ability to pay rent.

How to Conduct Income Verification in Compliance with the Fair Housing Act

When putting together your rental criteria, you need to be sure that your verification process is in compliance with the Fair Housing Act. Here are some tips to verify that your proof of income processes are compliant:

1. Use Standard Applications – The applications that renters fill out should be standardized, meaning everyone fills out the same questions. One of the main points of the Fair Housing Act is to prevent discrimination. By standardizing your application, you can ensure fairness.
2. Be Transparent – Clearly explain the income verification process, including why you are requesting proof of income. Renters should have a clear understanding of why you are asking to verify income payments and what you do with the income information.
3. Obtain Consent – Before reviewing documents or contacting an employer, obtain written consent from the applicant. You don’t want your applicant to be blindsided by an unexpected request or phone call.
4. Have Applicants Upload Information – Your applicants should be the ones to upload their income information, such as a recent pay period pay stub, details on taxes, and their employer contact information.

Streamlining how to find tenants can take work upfront; however, it’s important to set standard protocols in your income verification process to maintain compliance with the Fair Housing Act.

Summary

Proof of income documents are a fundamental piece of reviewing a prospective tenant’s financial situation. After all, without verified documents, it can be difficult to tell whether the tenant will be a good fit for your property and pay rent on time. Implementing standardized processes and procedures can help maximize compliance with the Fair Housing Act and streamline the review process. For more information about the approval process, check out our other posts.