Employment & Income Qualification

Although there are many screening items that are important, verifying an adequate source of income that the applicant will use to pay rent is usually near the top of the list. As a landlord, you want to determine whether the applicant has sufficient, stable income to afford the rental property. If the applicant lacks the financial ability to pay or cannot meet acceptable alternative arrangements, such as a guarantor, there is no need to proceed with other screening reports.

Time is a key factor in conducting tenant screenings to identify qualified candidates. Obviously, the earlier the determination of a likely candidate who has adequate funds, the better. It is a waste of time and money pursuing a course of action that will be futile. A rental information packet, available to interested parties, can provide your rental policies and procedures including income qualifications. Prospective applicants can quickly determine if their income will fall within the stated requirements.

In general, a landlord can request whatever financial information is desired in order to confirm the applicant’s ability to pay under the legal, reasonable, and logical criteria the landlord uses, so long as the same requirements are demanded of all applicants.

Gross income (income before deductions) is used as the industry qualifying standard. Government assistance programs base applicant eligibility on gross income. For landlords, the simplest income qualification determination is to require a gross income of a certain multiplier times the rent. As a general rule, most landlords use the industry average, a multiplier in the range of 2.5 to 3.0 times the monthly rent. For example, if the unit rents for $1,000, an applicant would need a monthly gross income in the range of $2,500 to $3,000. Using a multiplier as a rule of thumb is more convenient than attempting to generate an after tax income expense statement for each applicant.

It is important that you use the same multiplier for all applicants for the current vacancy. However, you are not necessarily prohibited from using a different multiplier for future vacancies in the same building or at other locations. While a gross multiplier is useful, it usually cannot be the only consideration and some degree of cash flow analysis is often required. You may also try to take into account how spendable income is dependent on income tax considerations. This means considering both (1) sources of income – i.e., whether or not taxable – and (2) circumstances that affect tax bracket – e.g., number of exemptions or special deductions such as depreciation.

There are many sources of income with wage earnings being the most common. Other sources of income include self employment, stocks and bonds, trust funds, mutual funds, spousal or child support, government assistance, and income from rental properties.

In some states, landlord participation in a Section 8 public housing program is voluntary, while in others, landlords are required to accept Section 8 recipients. While a landlord may be required to accept Section 8 as the tenant’s source of income, the tenant’s gross income must still meet the landlord’s income qualification standard. If the applicant’s gross income fails the income requirement, and provided the same standard is applied to all tenants, the landlord can reject the application.

In certain states, a source of income falls under a protected class category. In those states, if a landlord rejects applicants receiving government assistance, the landlord’s action will be considered discriminatory. In some states, arbitrary discrimination, that is, discrimination based on a personal trait or characteristic not otherwise named by local, state, or federal law, is illegal. Attempts to circumvent denial of housing based on the source of income by using some other characteristic may subject the landlord to discrimination charges and possible penalties.  

In a situation where a disabled applicant requests accommodation of terms in order to qualify, the landlord must consider the applicant’s request and work with the applicant to determine if there is an acceptable solution. For example, if the disabled applicant’s source of income is government assistance but the gross amount is less than the landlord’s income standard, the applicant may request the landlord to accept a co-signer in order to meet the rental obligation. The landlord cannot summarily dismiss the applicant’s request. However, the landlord retains the right to screen the co-signer applicant just as he would any applicant. If the co-signer satisfactorily meets the landlord’s customary selection requirements, the landlord will be required to accept the applicant under reasonable accommodation laws. 

To safeguard individual privacy rights and to protect sensitive information, many employers now require specific written authorization from the employee to release employment data. The best approach is to have a separate and specific release form for employment verification (dates of employment and wage amounts) signed by the applicant employee and mailed or faxed to the appropriate employment department.  

A copy of the Employment Verification form can be included in the Information Package or handed out when the application is submitted. It is the responsibility of the applicant to insure that the completed form is returned to the landlord by the employer in a timely manner, with a deadline being stated. Don’t hesitate to check the legitimacy of the returned “Verification of Employment” form if you have any reason for suspicion.

Employment and income documentation can consist of requiring the applicant to produce the last several paycheck stubs. Note that last year’s W-2 provides no certain information regarding current income, although it might be useful as additional verification if other items are questionable.

Pay stubs are useful for confirming employment information and sometimes even to verify the applicant’s Social Security number. Review the pay stubs to verify that the applicant’s name, address, and SSN are the same as shown on the application. The pay stub may also show the pay period, monthly, bi-weekly, or weekly. Make copies of the stubs.

Verification of non-employment income must be considered on a case-by-case basis with a verifiable document, appropriate to the source of income, requested from the applicant.

Self employed individuals can be asked to provide copies of their tax returns. Last year’s 1099s mean little, as it is net profit shown on the Schedule C rather than gross revenues that counts, except that they can be useful for verification of gross income. However, you must remember that self-employed individuals often do not receive 1099s for all gross income and, in fact the percent received may be very low. In other words, the total of 1099s is a minimum income and may be substantially less than the actual.

It is legal to require that an applicant provide evidence by showing income tax returns. Keep in mind that the return will usually not be providing current information, depending on the time of year, possibly as much as about 15 months old. However the bigger problem is that, with today’s computer software, it is possible to generate a tax return within minutes that is in no way related to the one filed with the IRS. It is possible to obtain a copy of an applicant’s Form 1040, as well as attached forms and schedules, directly from the IRS with the permission of the applicant. However, the typical screening and selection process time would not usually allow doing so. Additionally, the cost of the copies, particularly if multiple attachments are necessary, may be prohibitive.

Verification of non-earned income, including interest, dividends, and other investment cash flow and entitlement items, including disability, spousal support, social security, and private retirement, are all relatively easily verified because the recipients are provided official statements of the amounts.

Verification of child support depends on how the applicant receives payments. If payments come through “child support enforcement” or a similar agency, the applicant can obtain a printout of recent payments (most states will provide 6 months payment history). Regardless of whether it’s paid through an agency or directly to the applicant, the applicant should usually have proof of that from copies of checks received, bank deposit receipts, or bank statements.

For spousal support, even if the applicant didn’t make copies upon receipt of checks, it may be possible to obtain copies of the cancelled checks from the ex-spouse.

Although child support does not show up on income tax returns because it is not taxable, spousal support (alimony) is taxable and should be shown on income tax returns.

Your selection policies should address the issue of cash-only workers. Cash employment presents problems because most cash employers will be willing to furnish documentation of employment and cash payments. If a cash-only worker can provide adequate documentation of his cash earnings and the likelihood of steady future income from his employer, you may wish to accept his application for further tenant screening. While you cannot arbitrarily discriminate, you can enforce your policy requirement of legitimate, adequate documentation of source of funds for rental payments.

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