What is Income Verification? 7 Things You Should Know

You wouldn’t hire someone for an important job without verifying they have the degree or experience required for the position. Similarly, you shouldn’t lease out your valuable properties to tenants without verifying they can pay what you’re charging for rent.

As much as you may agree with the above sentiments, you may wonder how to effectively verify an applicant's income. It can be a daunting task with a lot of moving pieces, and if you get it wrong, you might just end up with a tenant who can’t afford to pay.

In this article, we'll provide some tips and tricks to help you effectively verify the income of your prospective tenants.

WHAT IS INCOME VERIFICATION?

Before we provide details on the specifics you need to know about income verification, let’s start with a basic understanding: what is income verification?

Income verification is a vital step in the leasing process that allows housing providers to ensure that potential tenants have the financial means to afford the rent on their property. In addition, taking measures to verify income enables you to make an informed decision about your renters, mitigating the risk of late or missed rental payments.

During income verification, a property manager completes several tasks to confirm an applicant’s financial status. Some of the documentation you may request during this process includes:

• Identity documents
• Pay stubs
• Bank statements
• Tax returns

The documents should prove that the applicant has sufficient income to pay for the property. In addition, they should confirm their employment status matches the status they listed on their rental application.

Reviewing the documentation provided manually is time-consuming and may result in errors. Instead, you can use specialized software solutions to flag inconsistencies or suspicious information. RHAWA’s new screening partner, Intellirent, can help you streamline the income verification process by automatically cross-referencing the information applicants provide with various databases.

Verifying income is crucial to your leasing process because it provides you with a clear understanding of the applicant's financial situation. To reduce the risk of delinquency in rental payments, you need to implement robust income verification processes for your properties.

1. Consider Fair Housing Laws

Housing providers must first remember fair housing laws when verifying income. These laws are in place to prevent discrimination against applicants based on their income source.

For example, rejecting applicants solely because they receive public assistance, such as Section 8 housing vouchers, is illegal.

It's essential to treat all applicants fairly and evaluate their ability to pay rent based on their overall financial situation rather than base decisions purely on income sources. By adhering to fair housing laws, you can ensure a fair and inclusive rental process while avoiding potential legal issues.

2. Don’t Just Consider Applicants with Standard Employment Income

In compliance with Washington State anti-discrimination laws that prohibit any discrimination based on “source of income,” you should also ensure that you are not simply considering applicants with standard employment. It can be tempting to show preference to applicants with traditional jobs that provide regular pay stubs, but applicants with other income sources can still be reliable renters.

Some strong applicants may be self-employed, work on commission, or have income from investments or rental properties of their own. Unfortunately, these types of income don’t supply pay stubs, so to accurately verify their income, you'll need to adapt your approach.

Request appropriate documentation and take the time to review and validate their income from these alternative sources. By considering all legitimate sources of income, you can ensure that you pay attention to potentially qualified applicants who may be excellent renters.

3. Always Include Credit History

When assessing an applicant's financial suitability for a rental property, you must consider more than just their income. Another critical piece of the puzzle is the applicant’s credit history.

Credit history provides valuable insights into an applicant's financial responsibility and payment patterns. While a less-than-perfect credit history doesn't necessarily mean an applicant will be a bad tenant, assessing their financial track record is essential to make an informed decision. Even if your applicant lacks established credit history in the U.S., Intellirent’s international screening services will usually provide the information you need.

Look for the following to identify potential risks:

• Outstanding debts
• Delinquent accounts
• Miscellaneous credit issues

Considering credit history as part of the income verification process allows you to better evaluate an applicant's overall financial stability and their likelihood of paying rent on time.

4. Understand Income-to-Rent Ratios

Another important factor to consider during income verification is the income-to-rent ratio of each applicant. This ratio represents the proportion of an applicant's income that would need to go toward rent if you approve them for your property. This figure helps determine if the applicant's income can afford the rental property comfortably.

As a general guideline, the rent should not exceed 30% of the applicant's income. However, remember that this ratio may vary based on location and the applicant's overall financial obligations. By understanding and applying income-to-rent ratios, you can ensure that tenants have a good financial capacity to afford the rent without struggling to pay for their other essentials.

5. Organize Documentation

If there’s one thing the income verification process is full of, it’s documentation. You will need to have a process to organize the substantial amount of pay stubs, credit reports, and bank statements you will collect during your income verifications.

It is essential to keep all verification documentation well-organized and appropriately secured to maintain efficiency for your business and the security of your applicants’ information. This organization will enable you to easily access the information when needed and maintain the privacy and confidentiality of the applicant's personal and financial details. Intellirent is a great solution for this as it allows for easy retrieval and protection of all sensitive documents.

Intellirent can also automatically flag suspicious or inconsistent information uncovered during verification. Their color-coded system is easy to read, with red flags for deal-breaking information and yellow flags for items you’ll want to take a second look at or discuss with your applicants.

6. Communicate Clearly with Applicants

Clear and effective communication with applicants during the income verification process will reduce your headaches and increase trust between you and your applicants. What information do you need to communicate to applicants?

• Documentation required: Communicate which documents applicants need to submit. Be sure to provide alternate options for applicants without pay stubs, etc.
  
• Submission deadline: When must the applicant submit their forms and documentation to be considered for the property? Include this information in all application information.
• Process steps: What does your verification process look like? Show clear steps for the applicant to increase transparency and give them a clear idea of the timeline and process they can expect moving forward.

Additionally, it can be beneficial to explain to applicants how income verification will be used to determine their eligibility for the property, which can help manage expectations and minimize potential misunderstandings or disputes.

7. Use a Third-Party Verification Tool

A third-party verification tool, like Intellirent, can be a game-changer for housing providers looking to step up their application and income verification processes. These services streamline the verification process and ensure accuracy in assessing an applicant's financial situation.

Intellirent provides a detailed report on the applicant's income and employment status. However, that’s only the beginning. Intellirent also assists with credit and criminal background checks. In addition, with their proprietary Smart-Match tool, you can approve high-quality renters within hours rather than days, filling your vacancies with approved renters more quickly and efficiently than with any other tool or process.

The enhanced services provided through RHAWA’s partnership with Intellirent make this the best tenant screening solution for Washington housing providers. To get started, just select Screening from the Member Access menu at RHAwa.org. If you have questions or need assistance, please contact support@myintellirent.com.