Self-employed tenants or rental applicants may not have pay stubs or an employer who can confirm their income, but that doesn’t mean their income can’t be verified. Tax returns, bank statements, and other financial records can help landlords assess whether an applicant meets their rental criteria. Today, we’ll discuss how to review those documents and screen self-employed applicants fairly and consistently.
Key Takeaways
- Self-employed applicants can document their income with tax records, bank statements, and other relevant financial records, even if they do not have pay stubs.
- Bank deposits and payment-processor records may show income patterns, but business revenue does not necessarily equal take-home income.
- Landlords should use written screening criteria and apply documentation requirements consistently to applicants in similar situations.
- A credit report can support screening, but it does not verify self-employment income. If a consumer report contributes to an unfavorable decision, landlords must provide the required FCRA adverse-action notice.
Why is Tenant Screening Important?
The first line of defense a landlord has regarding protecting their investment is thorough tenant screening. The important thing to remember is to follow Fair Housing Laws and consider the full picture of an applicant’s financial and personal background. Common screening criteria include a credit check, background check, income verification, employment, rental history, and references. Let’s review the benefits of proper screening procedures.
- Verify application information. Income records, rental history, and references can help landlords confirm relevant information provided by an applicant.
- Evaluate ability to pay rent. Landlords can review appropriate income documents and, if their policy includes it, credit information. No single record provides a complete picture of an applicant’s finances.
- Apply screening criteria consistently. Written, relevant criteria help landlords make decisions fairly. If a landlord reviews eviction or criminal-history information, they should verify its accuracy and follow applicable federal, state, and local requirements.
How to Screen and Verify Income for Self-Employed Rental Applicants
For self-employed applicants, verifying income can present the biggest challenge for landlords. However, that does not mean it is impossible or that these applicants are not as qualified as any other.
- Bank Statements
- Tax-Related Documents
- Credit Check
Bank Statements
Recent bank statements can help show an applicant’s deposit history and income patterns. Self-employed applicants may also have records from payment processors they use for their work. Because deposits do not necessarily equal take-home income, landlords should consider these records alongside other relevant documentation. Request only the information needed to apply the property’s written income criteria, and handle sensitive financial records securely.
Tax-Related Documents
Tax returns or IRS tax return transcripts can help document a self-employed applicant’s income over time. Applicants may provide copies of available returns or obtain a transcript from the IRS. Because prior-year earnings may not reflect current income, landlords can also consider recent, relevant financial records under their usual screening criteria. Apply documentation requirements consistently to similarly situated applicants.
Because self-employment income can vary from year to year, landlords may review more than one year of tax records when appropriate under their written screening criteria. Recent financial records can help provide context for an applicant’s current income.
Credit Check
If reviewing credit is part of your screening process, a credit report can show an applicant’s credit accounts and payment history. It won’t confirm how much a self-employed applicant earns, though, and it doesn’t tell the whole story about their finances. Apply your written credit criteria consistently, and give applicants a chance to flag information they believe is inaccurate. If a consumer report plays a role in denying an application or making another unfavorable decision, provide the adverse-action notice required under the Fair Credit Reporting Act.
What if the Applicant has Insufficient Income?
If an applicant doesn’t meet your written income requirements, a co-signer may be an option if your policy allows one. Offer that option and apply the same qualification standards to applicants in similar situations, whether they’re self-employed or not. A co-signer agrees to cover the tenant’s financial obligations as outlined in the agreement. Before accepting one, confirm they meet your written criteria and make sure they understand what they’re agreeing to.
The Pros and Cons of a Lease Co-Signer
- Pros – A co-signer helps protect landlords against possible non-payment of rent. Additionally, this policy allows owners to rent to individuals who are great candidates but fall slightly short on verifiable income or credit history. So, if you feel that the security deposit is not enough to recoup losses in the case of non-payment or damages, accepting a co-signer might be a good option.
- Cons – While a co-signer helps provide financial security, it cannot predict tenant behavior. Therefore, landlords may still face other issues that can lead to complaints, headaches, and even eviction. This is why it is vital to complete a comprehensive screening process and apply the property’s written screening criteria consistently. That way, you make an informed decision and remain comfortable with the amount of risk you are willing to take.
Landlords should apply screening criteria consistently and follow applicable fair housing laws. The federal Fair Housing Act prohibits housing discrimination based on race, color, national origin, religion, sex, familial status, and disability. State and local laws may provide additional protections, including protections related to age or source of income. Landlords should also consider reasonable accommodation requests when required.
Frequently Asked Questions About Screening Self-Employed Applicants
Can a self-employed applicant rent without pay stubs?
Yes. Self-employed applicants may be able to document their income with tax returns or transcripts, bank statements, payment-processor records, or other relevant financial documents. Landlords should evaluate those records under their written screening criteria.
Are bank statements enough to verify self-employment income?
Bank statements can show deposits and income patterns, but deposits may include business revenue needed to cover expenses. Reviewing them alongside other relevant records can give landlords a clearer picture of the applicant’s income.
Should landlords review more than one year of tax records?
It may be appropriate when self-employment income varies from year to year. Landlords should follow their written screening criteria and consider recent records when prior tax returns do not reflect an applicant’s current income.
Can a self-employed applicant use a co-signer?
A co-signer may be an option if the landlord’s written policy allows one. The same option and qualification standards should be applied to applicants in similar situations, regardless of how they earn their income.
Protect Your Investment with Full-Service Property Management
Successful investors know the key to having a suitable tenant in your rental is proper tenant screening. Whether a person is self-employed or not, there is a risk that any tenant may be unable to fulfill their monthly rental obligations.
Completing tenant screening is just the beginning of a landlord’s responsibilities. Thus, having an experienced property management group on your side can make all the difference. Bay Property Management Group can help verify applicant income and conduct thorough screening in accordance with applicable federal, state, and local requirements.
Once the tenant moves in, our work is just beginning. Our local property managers handle everything from rent collection to tenant communications and maintenance needs. Are you ready to take advantage of Bay Property Management Group’s full-service approach to rental management? Contact us today for a free, no-obligation rental home analysis.
