An important part of tenant screening is making sure your prospective tenant has verifiable income and employment. You want to make sure the tenant has a stable source of income and that this income is from a legal occupation. A drug dealer, for example, may have a ton of cash on hand, but this is not the type of tenant you want moving into your property.
Verifying income and employment is a three part process:
- Request paystubs and W2s, or bank statements and Form 4506 from the IRS.
- Contact their employer and issue an employment verification request.
- Run a Credit Check.
1. Requesting Paystubs and W2s, or Bank Statements and Form 4506 From the IRS.
The first part of verifying a prospective tenant’s income is to request the appropriate documentation from them.For Prospective Tenants Who Have an Employer:
The simplest request is for a paystub. You will want to request paystubs from the last two or three months. This paystub will list the pay begin and end date, so you can use it to determine the tenant’s weekly, monthly and yearly income. This paystub will list both the gross and net (after taxes) income for the applicant. It should also list their year to date earnings.W2s:
As an additional protection, you should ask for copies of the applicants W2 form. This will show how much income they declared for the previous tax year. It will allow you to see they have had a stable income for the past year.For Prospective Tenants Who are Self-Employed:
Since people who are self-employed will not have a paystub, the best thing you can do is request copies of their bank statements to verify they have income coming in. You should request bank statements from the past two or three months to get a better picture of their average monthly income.File Form 4506 with the IRS:
Some landlords are hesitant to rent to individuals who are self-employed because it is trickier to verify their income. One way to do this is to have the prospective tenant submit Form 4506 to the IRS, which is a request to receive a copy of the tenant’s federal tax records. The problem with this is the time it takes to receive this copy. It can take up to 60 days to process this request, and most landlords cannot wait this long to fill a vacancy. The cost is also an issue, as it is $57 to receive this copy.
A quicker and cheaper (free!) option is to file form 4506-T, which is a request for a transcript of the tenant’s tax returns. This usually only takes one business day to receive and will contain the vital information you are looking for.
2. Contacting Their Employer and Issuing an Employment Verification Request
This is for prospective tenants who have an employer. To verify their employment, you will want to contact the employer directly and issue an employment verification request. This is to ensure the applicant does in fact work there and to verify the income claim they made.See Also: Sample Employment Verification Request Form
3. Running a Credit Check
Running a credit check on a prospective tenant will give you insight into their financial health. This credit check will show you if they have been able to fulfill all of their financial obligations. You will learn their credit score, how much debt they have, if they have ever filed for bankruptcy, if they have any judgments against them and even if they have ever been evicted.
It is particularly useful to compare the prospective tenant’s total debt to their income, which is called their debt to income ratio. If they are making $40,000 a year, but have $40,000 in debt, they could have difficulty fulfilling their monthly mortgage payment.
While a credit report does not list a person’s current or previous employers, it does show who has run a credit check on the individual. Employers will often run a credit check on an applicant before hiring him or her. The credit check may show you a list of employers who have also checked this tenant’s credit recently, although it does not mean they actually hired the applicant. You would have to delve further and contact the employer directly to determine the companies where the tenant was actually employed.See Also: How to Run a Credit Check on a Prospective Tenant