How to Screen Applicants like a Pro (Part 3): Verifying Stability

Everybody wants to have tenants that diligently pay rent every month, but veteran landlords know that it’s easier said than done. Most landlord-tenant disputes revolve around money matters (especially missing or late rent payments), and a lot of these issues arise simply because it’s difficult for many DIY landlords to verify the financial stability of prospective tenants.

Tenants can and will (sometimes) lie on the rental application, so you need to verify their words and documents with the right screening tools and systems. The bottom line is to secure their employment history, status, and average monthly wages.

But, as we discussed in Part 2 of this series (LINK), you might also want to consider going beyond the traditional, “income must = 3x rent” qualifier. Similarly, when it comes to an applicant’s likelihood to pay on time and in full, their average monthly wages alone may not be the strongest indicator. Many pros look at their overall income stability, instead.

So how can you verify income stability like a pro?

CHECK THEIR HISTORY

Request these from employed applicants:

• 1. Pay stubs

Not just the most recent one, but ask them to backtrack for at least the last three months. All of them should also list the YTD earnings to give you a bigger picture of their income.

• 2. Wage and Tax Statements

Or W-2s for short, will show further proof that they are indeed employed and have been receiving income (and paying taxes) for the past year. You’ll also see their total income from the previous year.

Request these for self-employed applicants (e.g., freelancers, consultants, independent contractors):

  3. Bank Statements

Instead of pay stubs, you can ask for their bank statements to see how much they’re earning each month. Check the amount (if it’s high enough to afford your rental) and the stability (if it’s consistent across months).

 4. 1099 Forms

These forms are the counterparts of W-2s, distributed to independent or self-employed workers who pay their own employment taxes. All the same, these forms will show how much they are being paid by their clients, giving you a sense of their total income from last year.

Request these from retired applicants who don’t receive job-related income anymore:

5. Social Security Statement

These forms will show that they are receiving stable, government-provided income.

6. Annuity Statement

These statements will show that they have deferred annuities that often replaces or supplements retirement income.

7. Bank Statements

You can still ask for the bank statements to see the amount they regularly receive in their bank account.

8. IRA/401(k)/Pension Distribution Statements

IRA and 401(k) will help you verify their income, while Form 1099-R will show you the pension that was distributed (and, therefore, claimed).

9. Unemployment Statement

These are generated by the government and formalizes the applicant’s lack of employment. It also indicates the support they are receiving from the state.

CHECK THEIR STATUS

If applicable, you can also verify the legitimacy and stability of their current employment by getting in touch with the employer directly.Ask for a Salary Verification Letter from said employer, explaining that you’re doing a routine verification of employment stability as part of your screening process. If they ask for authorization, provide documents that show you have the tenant’s approval. This can be a copy of the signed Rental Application or other information release form.

The Salary Verification Letter will show the following:

1. Job position and title

2. Date of hire

3. Salary (hourly wage, average commission or tips, etc.)

4. Possible income changes in the next 12 months

You will see how long they’ve worked there, their income, and if they’ll continue to be an employee in good standing. Alternatively, you can call up employers and ask this over the phone, to get a more detailed picture.

No matter how well the applicants pass your other screening factors, it’s still crucial for you to get the whole picture before signing a lease with them. Their stability will determine their responsibility--both as an individual, an employee, and a paying tenant. A well-rounded, professional screening process like this will help save you from costly, time-consuming evictions and missed or late payments.

This is the third installment to our series: How to Screen Applicants like a Pro. We’ve already covered how to verify credit reports and DTI ratios - next time we’ll give you expert tips on verifying their rental history.

Any experience with verifying income stability? Any tips you’ll like to share?

Image Courtesy of Christina Morillo