Verify Commission Income for Renters

• Landlords must verify income sources, including commissions, to assess an applicant’s ability to meet their rent obligations.
• A two-year earnings history helps smooth out seasonal or variable income for accurate screening.
• Year-to-date paystubs and W-2s are essential documents to verify commission-based income.
• Commission income can be inconsistent, so landlords should require additional documentation like tax returns or bank statements.
• TenantFlow’s document vault helps landlords organize and securely store income verification records for all applicants.

Why Landlords Must Verify Commission-Based Income

Commission-based income can be unpredictable, making it challenging for landlords to assess an applicant’s financial stability. Unlike salaried employees with consistent paychecks, commission-based workers may experience fluctuations in earnings due to market conditions, performance, or seasonal demand. As a landlord, verifying commission-based income ensures that applicants can reliably meet their rent obligations and reduces the risk of late payments or evictions.

Start by requesting a W-2 form, which provides a summary of the applicant’s annual income, including commissions. However, a W-2 alone may not paint a complete picture because it only reflects earnings for the most recent tax year. To gain a more accurate understanding of an applicant’s income stability, request paystubs covering the past 12 to 24 months. These documents will show the highs and lows of their earnings, helping you assess whether they can consistently afford the rent.

For applicants with highly variable income, consider requesting additional documentation such as tax returns or bank statements. Tax returns provide a comprehensive overview of an applicant’s income over several years, while bank statements can reveal their cash flow and spending habits. Combining these documents with paystubs and W-2s will give you a well-rounded view of an applicant’s financial situation.

Gathering the Right Documents for Income Verification

To verify commission-based income, landlords need specific documents that provide a clear and accurate picture of an applicant’s earnings. The most crucial documents include W-2 forms, year-to-date paystubs, and a two-year earnings history. These documents help landlords assess an applicant’s income stability and ability to meet their rent obligations.

Requesting W-2 Forms

A W-2 form is a standard document provided by employers that summarizes an employee’s annual income, including wages, salaries, and commissions. Request a W-2 form from applicants to verify their income for the most recent tax year. This document is essential because it provides a baseline for an applicant’s earnings and helps landlords determine if they meet the 3x rent-to-income rule.

Collecting Year-to-Date Paystubs

Year-to-date paystubs are crucial for verifying commission-based income because they show the applicant’s earnings over a specific period. Request paystubs covering the past 12 to 24 months to understand the applicant’s income trends. Paystubs provide a detailed breakdown of their earnings, including base salary, commissions, bonuses, and other income sources. This information helps landlords assess the applicant’s ability to consistently meet their rent obligations.

Reviewing a Two-Year Earnings History

A two-year earnings history provides a comprehensive view of an applicant’s income stability. Request documents that show their earnings for the past two years, such as tax returns or employment verification letters. This information helps landlords identify any significant fluctuations in income and assess the applicant’s financial reliability.

Analyzing Commission-Based Income for Tenant Screening

Once you have gathered the necessary documents, analyze the applicant’s commission-based income to determine their financial stability. Look for patterns, trends, and any red flags that may indicate inconsistent income or financial instability.

Calculating Average Monthly Income

Calculate the applicant’s average monthly income over the past 12 to 24 months using their paystubs and W-2 forms. This calculation will give you a more accurate picture of their income stability compared to relying on a single month’s earnings. Divide the total income by the number of months to determine their average monthly income.

For example, if an applicant earned $60,000 in commissions over the past 12 months, their average monthly income would be $5,000. Compare this figure to the rent amount to ensure they can afford the rental property.

Identifying Income Trends and Patterns

Look for trends and patterns in the applicant’s commission-based income. For example, do they earn more during specific seasons or months? Do their earnings fluctuate significantly from month to month? Identifying these patterns helps you assess the applicant’s ability to consistently meet their rent obligations.

Watching for Red Flags

Be on the lookout for red flags that may indicate financial instability. For example, significant gaps in employment, frequent job changes, or inconsistent income over an extended period may signal that the applicant is not a reliable tenant. Additionally, if their income is highly variable and they have no savings or alternative income sources, they may struggle to meet their rent obligations.

Handling Inconsistent or Variable Income

Commission-based income can be inconsistent, making it challenging for landlords to assess an applicant’s financial stability. To handle variable income, consider requesting additional documentation and implementing flexible screening criteria.

Requesting Additional Documentation

If an applicant’s income is highly variable, request additional documentation such as tax returns or bank statements. Tax returns provide a comprehensive overview of their income over several years, while bank statements can reveal their cash flow and spending habits. Combining these documents with paystubs and W-2s will give you a well-rounded view of their financial situation.

Implementing Flexible Screening Criteria

Consider implementing flexible screening criteria for applicants with variable income. For example, you may require a higher income-to-rent ratio or a larger security deposit to offset the risk of inconsistent income. Additionally, you may consider requiring a co-signer or guarantor to ensure that the rent is paid on time.

Organizing and Storing Income Verification Documents

Properly organizing and storing income verification documents is essential for landlords to maintain accurate records and ensure compliance with legal requirements. TenantFlow’s document vault helps landlords securely store and organize income verification records for all applicants. This feature allows you to quickly access and review documents when needed, streamlining the tenant screening process.

Creating a Document Checklist

Create a document checklist to ensure you have all the necessary documents for income verification. Include items such as W-2 forms, year-to-date paystubs, tax returns, and bank statements. This checklist will help you stay organized and ensure that you have all the information needed to make an informed decision.

Storing Documents Securely

Store income verification documents securely to protect the applicant’s personal information and comply with legal requirements. Use a secure online platform like TenantFlow to store and organize documents, ensuring that they are easily accessible and protected from unauthorized access.

Common Mistakes to Avoid When Verifying Commission-Based Income

When verifying commission-based income, landlords should avoid common mistakes that can lead to inaccurate assessments and financial risks.

Relying on a Single Month’s Income

Relying on a single month’s income to assess an applicant’s financial stability can be misleading, especially for commission-based workers. Their earnings may fluctuate significantly from month to month, making it essential to review a longer period of income history. Request paystubs covering the past 12 to 24 months to get a more accurate picture of their income stability.

Ignoring Additional Income Sources

Applicants with commission-based income may have additional sources of income, such as side jobs, investments, or government assistance. Ignoring these sources can lead to an incomplete assessment of their financial situation. Request information about all income sources and consider them when evaluating their ability to meet their rent obligations.

Overlooking Employment History

An applicant’s employment history can provide valuable insights into their income stability and reliability. Overlooking this information can lead to missed red flags, such as frequent job changes or gaps in employment. Request employment verification letters and review their work history to assess their financial reliability.

Related reading: Child Support Alimony As Qualifying Income.

FAQ

How do I verify commission-based income if the applicant is self-employed?

For self-employed applicants, request tax returns, bank statements, and profit-and-loss statements to verify their commission-based income. These documents provide a comprehensive overview of their earnings and financial situation, helping you assess their ability to meet their rent obligations.

Can I accept bank statements as proof of income?

Yes, bank statements can be used as proof of income, especially for applicants with variable or commission-based income. However, they should be used in conjunction with other documents like W-2s, paystubs, and tax returns to get a complete picture of their financial situation.

What should I do if an applicant’s income is too variable to meet the rent requirements?

If an applicant’s income is too variable to meet the rent requirements, consider requesting a co-signer or guarantor to ensure that the rent is paid on time. Additionally, you may implement flexible screening criteria, such as a higher income-to-rent ratio or a larger security deposit.

How can I ensure that the documents provided by the applicant are authentic?

To ensure the authenticity of the documents provided by the applicant, verify them with their employer or a third-party verification service. Additionally, cross-check the information on the documents with other sources, such as tax returns or bank statements.