As a landlord, you want to find a great tenant for your rental property to ensure a profitable term with minimal complications. Screening tenants is a fine art and knowing how to find the right tenant while complying with the Fair Housing Act is essential.
One element of choosing great tenants includes verifying a prospective tenant’s income. While at first glance this topic appears to be very clear cut, the relationships between multiple tenants can quickly become very grey. In this article we’ll shed some light on the must-do’s of income verification and provide suggestions that will help guide your income verification efforts.
First things first: be sure to provide all applicants with the criteria you will be screening them against—before they pay the application fee and fill out the application. This includes the income criteria you will be using.
The Fair Housing Act does not state how much a tenant must earn in relation to the monthly rent, but the Act does stress consistency when dealing with prospective tenants. The consistency mandate applies to a particular unit. In other words, you must use the same income requirements for all applicants for a particular unit during the screening process. However, you can use different income requirements for different units at a different property based upon your business needs—as long as you’re applying a consistent income criteria while going through the screening process for units within a particular building. For example, you can use different income criteria for each of your single family homes. However, for your multi-unit properties, you should use the same income criteria for each unit within the building.
So what should your income criteria be? Investors commonly require tenants to have a monthly income of at least three times the monthly rent (e.g. the tenant must make at least $3,000 each month if rent is $1,000 per month). Though common practice and simple to use, this method is not the only income criteria you could use. As the investor, you have the flexibility to make the income requirements appropriate to your business needs and experience. Other investors may use a debt to income ratio—much like a bank would use when approving a loan. A debt to income approach takes into account the prospective tenant’s amount of monthly debt payments. For example, a prospective tenant may earn three times the rent but half of that is going towards credit card, car, boat or other debt payments—effectively reducing their available income for rent.
Once you have determined your income criteria, it may appear to be a straightforward process in assessing whether or not your applicants match your income criteria. However, because of Fair Housing Act requirements related to familiar or marital status, things can quickly get fuzzy. Due to various non-related roommate situations, as well as increasingly broad definitions of “family”, you can quickly find yourself debating how to measure income in situations where the tenants are not married or where there will be adult children living in the unit.
So, how do we deal with these situations? The Fair Housing Center of West Michigan suggests some guidelines that investors can use to take into consideration the relationships of the applicants and type of offered housing:
- If each individual unrelated person will be required to sign a separate lease for a shared living space, then each person’s individual income can be taken into consideration. In other words, each of the tenants must meet or exceed the income criteria. This is common for student rentals or—where allowed—in situations where individual bedrooms are leased within one unit.
- If a group of unrelated individuals is renting out an apartment together and you choose to use only one lease, then the combined income of all applicants over the age of 18 should be considered. (This goes against most landlords’ instincts. In the past, it was common for landlords to require all unrelated individuals that were 18 years and older to sign a single lease to pass the income criteria—individually. This helped mitigate damages in circumstances when one of the adult lesees vacated the property. However, fair housing advocates says that this type of policy risks discriminating against unmarried couples or other persons not in traditional relationships.)
- If a family will reside at your property under a single lease, the combined income of all applicants over the age of 18 should be considered. (Be sure to check with your local codes on the definition of “family”.)
Once you know the relationships of the prospective tenant(s) and how the lease(s) will be executed, the next step is to verify income by asking for W2s, copies of pay stubs, or copies of bank statements. With this documentation you can measure if their income matches your qualifications. While this will show you their recent income, you want to be comfortable that they will be able to make the rent payments for the duration of the lease. Therefore, it is important to verify that their employment is as indicated on their application. You can do this by sending a written notice to the tenant’s place of employment requesting information to verify that they work where they say they work, they make the amount they claim to make, and that they will be employed for the foreseeable future.
If you’re using the debt to income ratio as part of the criteria, in addition to verification of income, you’ll need to obtain a full credit report to look for other debt payments. Full credit reports are available through the RPOA’s in-office full credit reporting service or through the RPOA’s partnership with ApplyConnect.
When screening for income, you must take into consideration all lawful sources of income. A lawful source of income is typically any source of income that is subject to income tax. For example, alimony is considered income under tax law but child support is not. However, many communities define lawful sources of income to include housing subsidies, such as Section 8 rental vouchers. Make sure you check your local ordinances for variances to the general rule of thumb. In any case, the income should be verifiable.
In conclusion, the goal is to provide equal housing opportunity to all individuals. When in doubt of how to handle your situation, be sure to seek out advice from other landlords, the RPOA, as well as reaching out to the Fair Housing Center in your area to best apply the income requirements.