Tips on Verifying Tenant Income Documents

Landlords often ask tenants for proof of income to gauge their financial stability and rent-paying capability. Effectively handling these documents is vital for property management, offering assurance that tenants can meet their rental responsibilities. This evidence of earnings and financial stability provides valuable insights for landlords when screening potential tenants, fostering a successful landlord-tenant relationship.

Most Common Income Documents

Pay Stubs

A pay stub is a document given by an employer to employees when they receive their salary. It includes details like gross pay, deductions (taxes, insurance, retirement), and net pay.

Pay stubs are financial records for both employers and employees, helpful for tracking income and managing finances. For landlords, they serve as proof of income.

When screening tenants, landlords can use pay stubs to verify income. Looking at the gross pay helps assess if the tenant can afford the rent. A common guideline is that rent shouldn’t exceed 30% of gross income.

It’s important to note that pay stubs offer a snapshot of income at a specific time. For a better understanding, landlords can request multiple pay stubs from the past few months to gauge income stability.

Tax Returns

Tax returns are essential proof of income documents submitted to the IRS, detailing an individual’s yearly earnings. They’re crucial for those without regular pay stubs, like freelancers or self-employed individuals. Even W-2 employees find tax returns valuable for a comprehensive income overview.

To verify income using tax returns, landlords typically request the past two years’ returns, ensuring income continuation. Obtaining them is easy through the IRS, an accountant, or tax preparation software.

When checking tax returns, ensure the applicant’s name and address match the rental application. Examine their gross and adjusted gross income. Monthly income is obtained by dividing gross income by 12. To assess housing affordability, divide this figure by 33%, ensuring one-third of income covers housing costs.

If adjusted gross income significantly differs from gross income, use the adjusted figure. It considers deductions like alimony or student loan payments, impacting disposable income.

Bank Statements

Bank statements are official summaries from a bank that detail all transactions in an individual’s account, usually on a monthly basis. They act as a ledger, showing incoming and outgoing money, including paychecks, transfers, bill payments, and other expenses. Bank statements are highly reliable proof of income, providing a clear overview of an individual’s earnings and spending habits.

To verify income and financial stability using bank statements, it’s common to review several months’ worth (typically three to six months). Look for regular deposits indicating stable income, such as salary deposits or payments from clients for self-employed individuals.

While bank statements are useful for proving income, they contain sensitive financial information. Therefore, handling these documents with care is crucial to ensure privacy and compliance with regulations.

W-2s

The W-2 form, also called a wage and tax statement, is a document employers give to employees and the IRS yearly. It shows total wages and taxes taken from the employee’s pay. This form is crucial for a detailed view of earnings, including federal and state taxes, social security, and Medicare.

W-2 forms are reliable for verifying income. As a landlord, you can ask potential tenants for their latest W-2 form as part of the application.

Remember, while W-2 forms are excellent proof of income, using them with other documents like pay stubs, tax returns, or bank statements gives a more complete understanding of a tenant’s financial status.

1099’s

1099 forms are important proof of income for self-employed individuals, freelancers, or independent contractors. Companies issue them to those who provided services worth at least $600 in a year, showing earnings and taxes for the self-employed.

Similar to W-2 forms for employees, 1099 forms are essential for filing tax returns when you’re self-employed. As a landlord, if you have self-employed tenants, requesting a 1099 form can be crucial for verifying their income. It provides a clear view of their earnings, helping assess their ability to pay rent.

Keep in mind that 1099 forms are usually issued annually around tax time. If you need the most recent income data, you might also ask for additional proof, like bank statements or a profit and loss statement.