How to Verify a Potential Tenant's Financial Stability

By Kailey Walters on October 31, 2018

When it comes to attracting tenants to live in your rental space, it’s important that both you and the prospective tenants know what you’re getting into. After all, they want the most bang for their buck… and so do you.

When you’re conducting interviews of potential tenants, you’re probably not thinking of doing a full-on background check — which may not be necessary in most cases, anyway. However, you may still want to check up on the tenant’s financial status to ensure that they are trustworthy.

The question is, how can you effectively verify a potential tenant’s financial background? While just thinking about the process may seem a bit overwhelming to you, don’t worry. Read on for some steps you can take that will help ensure the reliability of your prospective tenant and afford you some peace of mind.

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Request financial documents such as W2s, pay stubs, or bank statements, as well as Form 4506 from the IRS.

1. Pay stubs are a relatively simple and easy way of obtaining some basic financial information about your prospective tenant. You can request pay stubs from the past two or three months, and this time range can give you a general idea of the tenant’s earnings patterns. What’s particularly helpful is that, not only will the pay stub list the pay start and end dates to help you figure out the tenant’s weekly, monthly, and yearly income, but it will also display their year to date earnings.

2. W2 forms are also extremely helpful for you to check out the potential tenant’s financial stability over the past year. Simply request a copy of their W2 form in order to see how much income they declared over the previous tax year.

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3. Don’t forget about bank statements, either. These can provide useful information for you especially if your potential tenant is self-employed, as the statement will tell you how much monthly income they have generally.

4. What’s more, filing Form 4506 with the IRS is a particularly useful way of verifying someone’s income. Submitting this form to the IRS allows you to request to receive a copy of the prospective tenant’s federal tax records. However, as requesting this information can be a bit time-consuming and costly (it takes 60 days to process the request and costs $57), a helpful alternative is to file form 4506-T, which allows you to request a transcript of the tenant’s tax returns.

Contact the tenant’s employer and issue an employment verification request.

For potential tenants who have an employer, you can verify their employment by contacting the employer and issuing an employment verification request. This course of action will allow you to ensure that the potential tenant is telling the truth about where they work and verifies any previous claims they made about their income.

If you are not quite sure how to start or how to go about issuing a request, here is a sample form that might be of use to you.

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Run a credit check.

Running a credit check is extremely important if you want to check up on your prospective tenant’s financial history — namely, whether they have met their financial responsibilities in the past. The credit report makes you privy to a great deal of crucial financial information: their credit score, the amount of debt they have, if they have filed for bankruptcy before, if there are any judgments against them, and if they have ever been evicted. Reviewing this information is valuable to your understanding of how financially responsible they are, which can bring you one step closer to a decision on whether or not this tenant is a good fit for you.

The credit report also gives you the chance to look at the potential tenant’s debt to income ratio, which is a comparison between their total debt and their total income. This information can help you determine how responsible the potential tenant may be when it comes to their monthly payments.

What’s more, a credit report can reveal who has previously run credit checks on the individual you are investigating. The list may include previous potential employers; while it doesn’t specify whether or not these employers hired the individual, the information presented there does provide you with some outlet to further investigate your potential tenant, if you decide to contact the employers listed there.

When it comes to verifying a prospective tenant’s financial standing, there are many ways you can go about it. A key part of this method is doing your homework to ensure that you cover all your bases. Once you can say for certain that this tenant is financially trustworthy, you’ll be able to have some peace of mind in renting out your space to them.

By Kailey Walters

Uloop Writer
Stony Brook University

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