A Proof of Income Letter is a document that states how much someone is earning to verify whether they can pay for something.
Supplemental Forms
Landlords can support their real estate goals by asking potential tenants to submit a Landlord Reference Letter.
What Is Proof of Income?
For renters, proof of income is a document your new possible tenant uses to assure you, the landlord, that they can afford to pay the rent.
Along with other items requested on a Rental Application, proof of income documents help a landlord screen potential tenants and mitigate risk.
Although a pay stub is the most commonly used proof of income, several other documents can affirm your income, even if you’re self-employed.
Proof of Income Documents
When landlords demand proof of income, renters must submit certain documents as evidence.
Generally, renters must produce at least two forms of proof of income to protect landlords against false claims.
The documents below are the most common forms of proof of income. However, if your tenant has other documents that he or she wishes to use as evidence, talk to him or her about them.
Some documents hold more weight than others, so discuss what constitutes appropriate proof of income before accepting anything to avoid a hassle.
Do your research before accepting these alternate proofs of income!TIP
| Document Type | Best For | |
|---|---|---|
| 1 | Pay stubs | W-2 employees (including self-employed W-2 employees) |
| 2 | Letter of employment | Use with W-2 employee pay stubs |
| 3 | Tax returns | W-2 employees, self-employed business owners, contract workers, and freelancers |
| 4 | Social security statement | Proof of retirement income |
| 5 | Bank statements | Supplemental proof of self-employment income |
| 6 | New hire or employment offer letter | Newly employed W-2 workers |
| 7 | Court-ordered agreement | Some third-party income payments |
| 8 | Disability insurance statement | Proof of disability income |
| 9 | IRS Form 1099-MISC | Supplemental proof of income of self-employed individuals |
| 10 | CPA letter | Supplemental proof of income for self-employed individuals |
| 11 | Profit and loss statement | Supplemental proof of income for self-employed business owners |
Proof of Income for Employed Persons
Pay stubs
Also known as a payslip, a pay stub is a document from your tenant’s employer that delineates how much he or she makes, including any deductions.
This is commonly considered the strongest proof of income.
Where you should be careful: Contact the employer to check the pay stub’s validity.
Real-Life Example:
A landlord received an application from a prospective tenant who provided a pay stub showing a substantial monthly income. Although the pay stub appeared legitimate at first glance, the landlord noticed that the formatting seemed slightly off and the employer’s contact information was vague.
To verify the information, the landlord contacted the employer directly and discovered that the company had no record of the applicant. Further investigation revealed that the pay stub had been fabricated. As a result, the landlord denied the application, preventing potential financial issues down the line.
Letter of Employment
Also known as a salary verification letter, a proof of income letter is a note a renter’s employer writes describing the applicant’s role in the company, how much he or she earns, and how long they or she has worked there.
Depending on your potential renter’s relationship with his or her employer, this can also serve as a letter of recommendation instead of an employment verification letter that further assures the landlord that the applicant is trustworthy and not someone to avoid.
Where you should be careful: Confirm the proof of income letter with the employer since tenants can easily forge this document.
Signed Offer Letter
A signed offer letter can be helpful proof of income when applying for an apartment. It typically includes details such as the individual’s salary or hourly wage, start date, and any other pertinent employment information.
Where you should be careful: Pair the offer letter with current income proof (if possible), like recent pay stubs or bank statements, for a more convincing application.
Tax returns
A tax return is a document that reports the tenant’s income to a national, state, or local tax agency. It helps determine how much he or she pays in taxes.
Where you should be careful: Verify the tax return date to ensure it’s current.
Social security statement
A social security statement is a document from the Social Security Administration that uses the renter’s earning history to determine how much he or she will receive in benefits in the future.
You can go online at mySocial Security to acquire your social security statement.
Where you should be careful: A social security statement may be one of the most reliable forms of proof of income since it’s easy for renters to access and it’s a federal document.
However, its effectiveness for proving income will depend heavily on how the federal government decides to handle social security in the future.
Bank statements
Bank statements are monthly documents that disclose your transactions, including any withdrawals, deposits, or fees. This would include any income that gets deposited into your account.
Where you should be careful: Bank statements reveal much about your would-be tenant’s life, so be delicate when asking for this particular document and treat it as a last resort.
New hire or employment offer letter
If you’ve recently been hired at a new company or moved into a new position that will result in a significant income change, you may want to ask your employer for an employment offer letter.
It should include your start date with the company or the new position and your annual salary or hourly rate. The letter can be used to prove future income to lenders and landlords.
Court-ordered agreement
Are you recently divorced? A copy of a court document outlining child or spousal support owed to you can serve as proof of income from these sources.
Social Security award letter
A social security benefits letter verifies social security benefits, Supplemental Security Income (SSI), and/or Medicare income.
All of these should be included in your income calculations.
Disability insurance statement
If you receive long-term disability payouts from a disability insurance policy, those payments also count as income.
A disability insurance statement lists the amount of disability payments you receive every month.
Proof of Income Documents for Self-Employed Applicants
If you’re self-employed, don’t worry!
There are still documents you can furnish to vouch for your income.
IRS Form 1099 Miscellaneous Income
If your renter is a freelancer, Form 1099-MISC is a form that they should complete for each job that pays him or her at least $600.
Make sure to have your renter gather all of his or her 1099-MISC forms and turn them over to you so that you know that your renter can secure income for him or herself, even if they don’t have a traditional job.
Where you should be careful: Landlords find it difficult to determine the renter’s monthly income when relying entirely on 1099-MISC forms because there is no guarantee that the renter will be able to secure as many jobs as possible next month.
Tax returns
A tax return would be a great proof of income for self-employed individuals because it contains income information gleaned from your 1099-MISC forms. You can get an IRS 1040 form from our legal document library.
Bank statements
Similarly, even without a regular job, bank statements are a strong supplement for proof of income because they track any income deposited into your account.
Certified Public Accountant (CPA) letter of income
A CPA letter of income is written by your accountant or an accounting firm that handles your business finances. It typically states that the accountant has reviewed your tax return and can verify that you have income.
Profit and loss statement
If you own your own company, you typically generate profit and loss statements showing the business revenue minus expenses, such as rent, overhead, and payroll.
A profit and loss statement can be used to show a business profit as income.
Self-employed pay stubs
Independent contractors who work for various companies generally have their income reported on 1099-MISC forms. This means that self-employed individuals don’t receive standard pay stubs from the companies.
If you need access to a traditional pay stub and are self-employed, contact your bank’s small business solutions center or hire a payroll service to generate self-employed pay stubs.
Why Do You Need a Proof of Income Statement?
It is pretty standard for landlords to require proof of income before signing a lease agreement.
This is because income verification helps to guarantee landlords that they will get the money they deserve, decreasing their risk.
What Is an Ideal Rent-to-Income Ratio?
Now that your tenant has turned in their proof of income, how can you tell if the tenant has the means to lease your property? One way is to look at the rent-to-income ratio.
Generally, the standard is that the rent should be 30% of your tenant’s income.
If the rent is more than 30% of the renter’s income, your renter risks not making enough cash to pay for their lifestyle and, by extension, may be unable to pay rent regularly.
Calculating rent-to-income ratio
Let’s say your income was $30,000/year, and the rent for the property is $1,000/month.
$30,000/12 months = $2,500
$2,500 * 0.30 = $750
The tenant can afford up to $750 in rent, making the rent for this property too high.
Check out this online rent-to-income calculator if math is not your strong suit. Enter the desired rent-to-income ratio and the tenant’s salary, and the calculator will tell you how much rent your tenant can afford.
How to Use the Rent Coverage Ratio?
Another helpful ratio you can use to determine whether or not your tenant has the means to pay rent is the rent coverage ratio. Calculate this ratio by dividing your income by your total expenses.
A reasonable rent coverage ratio is 1.3 or higher. So, similar to the rent-to-income ratio, if your calculations yield a rent coverage ratio lower than 1.3, you step into the dangerous territory of your renter not being able to afford rent.
Calculating the rent coverage ratio
Let’s stick to your income as $30,000/year and your rent as $1,000/month.
Total expenses: $23,000
- Rent: $12,000
- Utilities: $3,000
- Food: $3,700
- Cable: $1,800
- Phone: $1,200
- Car: $1,300
$30,000/$23,000 = 1.3
The ratio is exactly 1.3, making the rent affordable to the tenant.
Summary
When the landlord agrees to take on a tenant, an essential consideration is whether or not the renter can afford to live at the property.
Thus, landlords need to know what constitutes proof of income to quickly determine if the applicant will be a fitting tenant.
Use this information on collecting proof of income to guide you as you choose a potential tenant for a rental agreement.
Frequently Asked Questions
Should I deny an applicant who is unemployed?
It depends on the overall financial stability of the applicant. While unemployment may be a concern, you can consider other factors such as savings, assets, or a guarantor/co-signer to determine their ability to meet rental obligations.
Is it legally required to ask for proof of income?
No, it is not legally required to ask for proof of income, but it is a standard practice for landlords to ensure tenants can afford the rent. Verifying income helps mitigate the risk of non-payment.
How can a student prove their income?
Students can prove their income through various means such as financial aid statements, scholarship documents, part-time job earnings, or a guarantor letter from a parent or guardian who will assume financial responsibility.
Can tenants fake a proof of income?
Yes, tenants can potentially fake a proof of income. It’s important for landlords to verify documents thoroughly, such as by contacting employers directly or using third-party verification services.
