As a rental property owner or manager, you are all too familiar with the scenario when tenants fail to pay rent on time. These situations often escalate into legal complications, including eviction proceedings, and can leave you struggling with cash flow shortage to cover the mortgage.
However, there is a silver lining: by prioritizing tenant income verification, you can proactively prevent these problems from arising. Want to learn more? In this blog, we will guide you through the process of verifying a tenant’s income and introduce you to solutions that can automate this process. Keep reading!
Why Is Tenant Income Verification Important
Verifying a tenant’s income is more than just a simple formality. It goes beyond ensuring the tenant has the financial ability to afford your property. Here’s why it’s so important:
- Financial Reliability: By verifying tenant income prior to signing any legal agreements, you can ensure that prospective tenants are capable of making monthly payments on time, thus guaranteeing a consistent cash flow for you.
- Risk Mitigation: By preventing tenants who may struggle to pay the rent from moving in, you can avoid the costly and time-consuming process of evictions down the line. With this proactive step, you also shield yourself from having to look for a new renter at the last minute, which could also result in delays in your revenue if finding a suitable replacement takes a long time.
As you can see, ignoring this essential step could result in financial losses and other unpleasant consequences. To help you steer clear of such outcomes, let’s walk through how you can verify tenant income.
How to Verify Tenant’s Income
Before you rent out a property, you must determine the minimum income that an applicant needs to earn each month in order to pay the rent. An easy method is to follow the 3:1 income-to-rent ratio, which means a prospective tenant’s gross income should be at least three times the rent. For instance, if the rent is $1000 per month, the applicant must earn a minimum of $3000 per month.
However, rental markets can vary greatly from city to city and year to year, so make sure to research your local market to understand its value.
Once the income-to-rent ratio is determined, you can then proceed to evaluate the applicant’s income and request proof of income for verification. To do so, first, you need to know the employment type of your prospective tenant.
In this section, we’ve listed all of the possible document types for you!
Employed Tenant’s Income Verification
For prospective tenants with an employer, the most common documents to request are:
- Salary slip. The best way to check for the exact income that tenants are earning is through salary slips.
- Employment statement. To confirm the tenant’s employment status and monthly salary rate, you can also request an employment statement.
Self-Employed Tenant’s Income Verification
It may not be as straightforward for self-employed tenants, but their income can still be determined through:
- Tax returns. An overview of the tenant’s yearly income can be found on tax return statements. It’s a reliable way to verify income for those who don’t receive salary slips.
- Bank statements. For entrepreneurs, bank statements can also be required to demonstrate what they earn and if they have enough money in their bank account.
Unemployed Tenant’s Income Verification
Unemployed individuals can obtain a variety of documents to provide as proof of income for rental purposes.
- Social Security statement. With this statement, you can easily verify the government income that a potential tenant receives.
- Annuity statement. Annuity statements help verify the amount of regular income received from an annuity, which can often replace a paycheck in retirement.
- Pension distribution statement. These forms are used to state the allocation of pensions (Forms 1099-R and statements for IRAs, for instance).
- Unemployment statement. This document is issued by the government to demonstrate the income compensation received by individuals who do not have an employer.
Methods of Tenant Income Verification
Once you have the right documents, it’s time to start the verification process! You can do it in one of the two ways:
- Manual verification works well for handling a small number of renters but becomes challenging to scale with a larger volume of properties and tenants. Manual checks lack scalability and may result in overlooking crucial details or potential document fraud, posing long-term risks.
- Digital verification leverages automation through advanced software, empowering you to maintain control over the process without requiring extra resources for exhaustive document checks. This approach is ideal for established businesses or those experiencing rapid growth, offering a future-proof solution.
In the next section, let’s dive into how the digital tenant’s income verification process works so you can witness the possibilities for yourself.
How Digital Tenant Income Verification Works
Digital tenant income verification transforms how you can verify the income of your tenants thanks to Intelligent Document Processing (IDP). It uses several cutting-edge technologies such as AI (Artificial Intelligence) and OCR (Optical Character Recognition).
This method provides a faster and more secure way to validate tenant income without the need for paperwork. This is a reliable process to ensure the financial viability of your tenants in just 4 simple steps.
- Document Collection: Your prospective tenant can be requested to provide income-related documents via email or your website. Depending on the employment type, they can submit salary slips, tax returns, bank statements, employment verification letters, or any document that allows you to verify their income.
- Document Extraction: The software automatically extracts relevant information from the uploaded documents using OCR technology. This includes names, income amounts, company, or job details.
- Data Validation: The extracted data is validated for accuracy and completeness to ensure that the provided information is consistent and reliable. Built-in AI algorithms allow for automated fraud detection by spotting any signs of tampering or irregularities.
- Data Transfer: Once the data is validated, the software converts it into a format that can be easily used in your software of choice and then forwards the data. Excel, JSON, CSV, any format is possible! This makes it easy to find the information needed to calculate if a tenant earns enough.
As you can see, embracing digital verification with IDP software makes document processing a breeze. And the benefits don’t end here!
Benefits of Digital Tenant Income Verification
The digital income verification process is a go-to if you’re looking for an efficient way to handle your tenant’s documents:
- Faster transactions: You can process rental applications in no time resulting in quicker financial transactions or commission payouts.
- Accurate tenant information: Automated document checks minimize errors, ensuring that your decisions are based on precise data.
- Higher productivity: Getting rid of manual tasks allows you to focus on your business growth or building a good relationship with your tenants.
- Positive landlord and tenant experience: If you have your own platform, digital verification offers quick and seamless verification which contributes to a positive experience for both parties.
Now that you have learned everything about tenant income verification, let us introduce you to the perfect fit for you.
Choose Klippa for Your Tenant Income Verification Needs
Klippa DocHorizon is a helpful solution for agencies and landlords who need to manage proof of income verification for rental purposes. It provides a range of features that can highly improve workflows, making it easier for both landlords or agencies and tenants.
With Klippa, you can extract and verify documents sent by tenants in just a few seconds and improve the overall experience by making rental agreements faster. Moreover, Klippa automatically detects document fraud, providing reliable information to make your decisions.
Klippa not only offers data anonymization capabilities to streamline GDPR compliance but is also ISO-certified, guaranteeing the utmost security for personal data.
Ready to level up your tenant income verification? Please contact us, or book a demo below.