When looking for an apartment, you have to go through a screening process. How thorough this is will depend on your building manager. One thing that is checked by all landlords, however, is whether you will be able to make the rent diligently at the end of every month.
For this reason, many landlords have decided to set a minimum income requirement for their tenants. In some cases, you will be informed of this requirement the moment you show an active interest in renting in the building. Sometimes it is indicated on marketing brochures, and sometimes, the landlord will deny your application based on whether your income source can sustain the rent.
The income requirements have other purposes as well. Read on to find out what they are, and what to do if your income does not meet the requirements to an apartment you have an eye on.
Why do income requirements exist?
Here are some of the purposes that income requirements serve:
- They help the landlord to keep away bad tenants. This term refers to tenants that do not pay their rent with due diligence. If a tenant delays the rent, the reason could be that they could not afford it or they made some poor financial choices. Most of the time, it is the former. Imposing an income requirement picks out only those who can afford the rent.
- They also help the landlord pick out what he might assume are good tenants. Setting a minimum income requirement assumes that because one makes enough money to cover the rent, they are going to pay on time every month.
- If an apartment building wants to maintain a certain aesthetic or keep a specific class of tenants, a minimum income requirement might do this. If this amount is high, it will discourage lower-income households from seeking residence there and some might move out of the building.
- Income requirements are also put in place to protect a tenant. If one moves into an apartment and they are unable to pay the rent, they leave the landlord with no choice but to evict them and this might render them homeless. These minimum requirements are in place to ensure a tenant lives at a place where they can also afford utilities and other essentials easily.
How are income requirements determined?
The main concern for all landlords is to know whether you can make the rent without causing any trouble. The only way for you to do this is if you have enough money. Landlords use a concept called the rent-to-income ratio to determine this.
What is the rent-to-income ratio?
This is a method that landlords- and even prospective tenants can use to see how much they are expected to earn to comfortably lease a unit in an apartment building.
This ratio can be solved using two methods:
1. Using the ratio multiplier
This method shows the tenant how much they are expected to be earning in the least to be able to rent an apartment.
In the real estate market, for one to be able to afford rent, they should be earning at least three times the house rent in gross income. In such a case, the ratio multiplier is 3.
Therefore the minimum monthly income requirement= monthly rent * 3(the ratio multiplier)
For example, if an apartment costs $1,200 in rent monthly, an individual would have to make $4,800 a month to qualify.
2. Using a predetermined percentage
This method shows the tenant the highest amount they can set aside for rent from their income.
In the housing industry, it is standard that not more than 30% of a person’s income should be channeled to rent. This makes our predetermined percentage 30%
Therefore, the maximum amount paid in rent monthly= (Gross Annual Income / 12) * 0.3
For instance, if an individual makes $75,000 a year, then the most they can pay in monthly rent is:
(75,000/12) * 0.3, which is $1,875.
Pros of the rent-to-income ratio
Getting these values makes it easier for the landlord and a prospective tenant to see if there is any financial risk that comes with entering into a lease agreement.
Since this is usually one of the first stages of screening a tenant, it saves the landlord the hassle and paperwork of processing a tenant application. It also saves the applicant time that would have been spent in meetings and interviews. They can direct that time and energy into searching for an apartment that is within their financial means.
Cons of the rent-to-income ratio
Gross income is not enough to judge an individual’s finances. The tenant may have other financial responsibilities like child support and paying off student loans.
Also, not all sources of income may be indicated in the W-2 income tally so the gross value may reduce the chances of a financially able would-be tenant.
How will the landlord know if you meet the minimum income requirement?
The landlord can only apply the predetermined percentage method of the rent-to-income ratio if they have an idea of how much money you make. They get this information by requiring that you give proof of income before you can finalize the lease.
There are many sources of income so similarly, there are many ways to show proof of how one makes money. Take a look at some of the most common documents that show proof of income.
- Pay stubs. This is a document given to all employees after each payment period. It shows the employer, their earning rate, how often the employee came to work, among other details. In addition to earning information, a pay stub can reveal a lot more about a tenant.
- Proof of income letter. This is a letter addressed to your landlord from your employee. It contains information on how much you make but discloses a lot less information than a pay stub.
- Tax form 1040. this is a document that shows all income that an individual has earned in the previous tax year. A disadvantage to this is that the financial position of the applicant might have changed from a year ago.
- W-2 statement. It is used to show an individual’s annual earnings and taxes. If the prospective tenant has multiple employers, ask for W-2 forms from all of them.
- Bank statements. These show your bank transactions and balances in a bank account. A drawback is that you cannot use it to verify employment.
What to do if you do not meet the income requirements
In some cases, an individual’s income will deter them from getting the apartment of their dreams. Here are a couple of options you can choose from to ensure that at the end of the day, there is a roof over your head, whether or not you meet the minimum income requirements:
1. Get an apartment in your price range
This might be the wisest and most affordable option for you. Searching for an apartment for which you meet the minimum requirement gives you a sense of security. Also, you could look for an apartment where the landlord does not require any proof of income. There are rare, so you will not have a wide variety of real estate to choose from.
2. Use your good credit
This tip will require that you already have good credit. This way you can appeal to your landlord using your income to debt ratio. If you have an impressive credit score and credit rating, it will help to show the landlord that you are capable of managing your finances well.
3. Find somebody to co-sign the lease agreement
A co-signer is like a form of security. It means that even though they might not live in the apartment unit with you, they will be responsible for covering the rent in any event that you are unable to. Keep in mind that your co-signer will be screened just as intensely as any other tenant.
4. Offer to pay a higher deposit
This will go well with your bank statements. By showing your landlord that you can and suggesting a higher security deposit, your application will look more attractive to him.
It will also show you are serious about moving into the unit and this might just get you in.
5. Move into an occupied apartment
If you can, you could choose to be a roommate in an already occupied unit. This means that the person currently in the unit has met the requirements. In some cases, only the primary leaseholder should meet the requirements. In this case, you only have to show that you can manage your share on time every time. However, some landlords require all roommates meet the requirements so that if one ever moves out, the remaining tenant(s) will be able to cover the rent.
5. Negotiate a lower rent amount
You could speak to your landlord about lowering your rent. Of course, this will require an exchange. Find something that can benefit the landlord for a couple of bucks off your rent. You could create ultimatums, for example, you have to pay the rent before the second day of each month and if you ever fail, it goes back up. You could also offer some handyman services for a reduction.
Housing is becoming more expensive by the day. Income requirements make life easier for both the landlord and tenant by ensuring the landlord always gets his dues and that the tenant is not financially straining to have a home.