What Landlords Need to Know about Income Verification

Unfortunately, many renters are optimistic when it comes to how much rent they can afford to pay each month. That’s why income verification—and income requirements!—are a vital part of the tenant screening process. You’ll need to establish income criteria for each unit you plan to rent out, collect pay stubs and other financial documents from each applicant, and use that information to figure out if they meet your standards.

What is income verification?

Income verification is a common step in the tenant screening process. Most landlords ask applicants how much they earn in order to make sure they can comfortably afford the rent each month. But since this number is self-reported, it's important to double-check whether it's accurate using various financial documents—and sometimes even giving a potential tenant's employer a call.

Why is it important to verify a potential tenant’s income?

It’s important to verify income for two reasons. One, prospective tenants can write whatever they'd like on the rental application form. It's up to you to confirm that the number is accurate. Two, a lot of potential tenants are over-estimating how much rent they can afford, going off their annual salary without accounting for the taxes and other expenses that come out of paychecks. By running the numbers for them, you'll be more likely to find a tenant who can consistently afford the rent.

What should my income requirements be for new tenants?

Standard income requirements vary by city, with New York City on the high end—landlords typically require a tenant's annual salary to exceed 40-50 times the monthly rent. But in most other places, landlords look for tenants whose monthly salary is about three times the rent. So, if you’re charging $1,000, an ideal tenant should bring in $3,000 or more per month. It’s called the rent-to-income ratio; industry standard says that any potential tenant should spend no more than 30 percent of their income on rent.

Determine what your income requirements will be in advance, and write them down. They can vary between units—you may have stricter requirements for higher-end properties. But the key is to use the exact same standards to judge every single person who applies to rent that unit. Otherwise, you'll leave yourself open to fair housing complaints—and big fines.

How do I verify a potential tenant’s income?

You’ll need to request certain financial documents from potential tenants as part of their rental application. Although every landlord’s process is different, some commonly requested documents include:

• W-2s: Income statement from a job that classifies the potential tenant as an employee
• Tax returns: Verifies actual annual income from all sources
• Employer reference letter: A letter from the renter’s job stating how much they earn
• Social Security statement: Verifies government income that can be used to pay rent
• Pay stubs for the past three months: Record of payday checks
• Bank statements for the past three months: Confirms money in the bank

Once you have everything in order, you’ll want to verify the documents are actually accurate. That means calling employers and checking the dates on statements and pay stubs.

What if my tenant has non-traditional income?

As more and more people join the gig economy, fewer renters are likely to have traditional sources of income. If that’s the case, you’ll want to ask for different documents. Tax returns, bank statements, and 1099s are the most commonly requested documentation here. (The 1099s show self-employment income per client from the past year.)

You may also want to ask for a letter from one of their clients saying that the potential tenant has guaranteed work at a certain rate throughout the year—though, depending on the type of freelance work they do, this may not be possible. Many businesses can’t make those predictions with certainty.

What are some red flags on income verification reports?

Income verification information isn’t always the most accurate or up-to-date. Pay special attention to dates on any paystubs or statements that you get. If they’re old, don’t use them as income evidence. If something looks fishy—or photoshopped—you may want to give their employer a call. Make sure to look up their number independently online or in the yellow pages, rather than using the number provided on the rental application form. Applicants occasionally list a friend's phone number instead of their boss' contact information.

What if a potential tenant doesn’t meet my income requirements?

Before you start screening tenants, you should make a decision about whether or not you’ll accept a tenant without recurring income—and how much they need to have in savings or other accounts instead. This is when bank statements come in handy, or other documents that show money in an account like stocks or an IRA. A potential tenant could have no job but $50,000 in savings that they’re planning to use to pay the rent, for instance. It's up to you whether or not you feel comfortable renting to them.

If a tenant doesn't meet your income requirements—but seems reliable in every other way—you can also take "adverse action," which is a fancy term for making them jump through additional financial hoops to be approved. Common adverse actions include:

• Requiring them to apply with a guarantor or cosigner
• Requiring a larger security deposit
• Requiring last month's rent be paid in advance

This is legal, but make sure to apply your standards consistently across applicants.

What laws should I be aware of when verifying income?

When it comes to tenant screening, it's incredibly important to be aware of fair housing laws. These laws—which exist on the federal, state, and sometimes even local levels—protect renters from discrimination based on race, nationality, gender, and more. Obviously, you shouldn't discriminate when judging applicants' income. Don't be more lenient with a white applicant who doesn't meet your income requirements than a Black one; don't require a guarantor from a woman when you didn't require one from a man with the same financials. That's why it's incredibly important to create a set of criteria before you start advertising your rental, and then apply it equally to every single applicant. If you don’t, you’re opening yourself up to potential discrimination lawsuits.

In addition, in some states—including California and New York—landlords can’t discriminate based on an applicant's source of income under fair housing laws. That means you can't turn away a freelancer because you're worried that their income is less stable than an applicant with a traditional 9-5 job, assuming that their income meets your predetermined requirements. In Washington, it's specifically illegal to not rent to someone because their income includes Section 8 vouchers or any other type of governmental assistance.

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