For many landlords, dealing with renter payment problems is one of the biggest stressors of the job. Partial payments, late payments, and especially nonpayment of rent can cause significant financial strain that puts your rental business in jeopardy. Tenant income verification is a key part of the tenant screening process that helps ensure prospective tenants can meet their monthly rent obligations.
The number one concern among independent landlords in the United States is nonpayment of rent, according to a survey conducted by TransUnion Rental Screening Solutions. About 84 percent of landlords ranked “Payment Problems” as the top concern in the study. It’s not surprising given the ramifications of renters who fall behind on payments. Evictions can cost a landlord $3,500 or more, in addition to unnecessary stress.
Sometimes the problem isn’t nonpayment of rent, but instead involves a tenant who is chronically late each month with the rent check. That situation still costs the landlord time to track down the rent payment every month. Nonpayment or erratic payments can also cause stress and financial troubles if a landlord relies on that income to cover his or her property mortgage.
For these reasons, it’s worthwhile to spend a little time and effort during the tenant screening process to verify whether an applicant’s income will be enough to cover the rent.
First, the landlord should calculate the minimum amount of income a tenant needs to earn in order to pay the rent each month. One simple way is to use the industry standard of 3:1 income to rent, meaning an applicant’s gross income should be at least three times the amount of rent. For example, if the rent on an apartment costs $1,500 per month, then the applicant must gross a minimum of $4,500 per month.
Of course, not every rental market is created equal. A landlord should research their market to understand the local market value, which can change dramatically from city to city and year to year. Most experts advise tenants not to spend more than 30 percent of their income on rent, but that’s often not possible in some locations such as New York City, for example, where residents can expect to pay two-thirds of their income on rent. Once you’ve decided on your target income to rent ratio, you can move on to analyzing your applicant’s income.
TransUnion SmartMove recently launched a new feature: Income Insights. It is a tool to help landlords quickly and easily evaluate their applicant’s income.
Income Insights enables you to:
Income Insights uses a statistical model to analyze an applicant’s spending and payment behavior from their credit report to estimate their income. In other words, it analyzes financial transactions such as credit card expenditures and payments, among other factors, to estimate an applicant’s total income.
Manual income checks can take hours or days to complete, leaving the possibility that a great applicant could find another apartment in the meantime. One of the key advantages of Income Insights is that the report is delivered within just a few minutes, enabling the landlord to quickly determine whether income verification is needed.
Additionally, Income Insights takes into account non-work related sources of income such as alimony and child support payments, which traditionally can be more difficult and time-consuming for a landlord to verify. This means that unlike a traditional paystub check, Income Insights can be used to evaluate the income of retired, unemployed, and self-employed applicants.
The Income Insights report delivers a clear recommendation of whether additional income verification is recommended for the applicant. If the landlord decides additional verification is needed, he or she proceed to the following steps below to verify income.
For employed applicants, the most basic way to verify income is to request any of the following:
Self-employed individuals represent a bit more of a challenge, but you can verify their income through:
Recently the industry has seen more Baby Boomers entering the rental marketas they look to downsize after retirement. For retired applicants that don’t receive job-related income and unemployed applicants, landlords have a few different options for verifying income.
There are several additional measures landlords can take to help ensure they get their rent on time each month.
Tenant income verification is a key step in the tenant screening process. TransUnion SmartMove can help landlords save time and effort verifying income with Income Insights, which analyzes an applicant’s self-reported income to determine whether additional verification is needed. If Income Insights recommends additional verification, landlords have several options for verifying income for employed, self-employed, and unemployed applicants.
In addition to income, landlords should review a credit report for renters, background check report, and eviction records before ultimately making a leasing decision. This is one of the best ways to ensure a positive rental outcome that keeps the rent check coming on-time.