Homebuyers

How Do Lenders Verify Income on Mortgage Loan Applications?

Purchasing a home is a big financial commitment—for homebuyers and for lenders.

Homebuyers using a mortgage to buy a home are typically agreeing to pay back their loan over a 30-year period. Lenders, meanwhile, are agreeing to loan out sizable amounts of money that won’t be fully paid back for those same 30 years.

That’s why lenders examine a buyer’s financial picture as part of the process of determining whether to lend to a potential borrower. 

One of the most important pieces of the puzzle for lenders is the borrower’s income. As part of the application process, lenders request specific financial information from those hoping to take out a mortgage.

But that’s not all: Lenders also take steps to verify this information since the company’s underwriters will use it to determine the borrower’s ability to pay back the loan.

“We need to verify income and employment, as well as the borrower’s possession of the funds to be used for the down payment,” said Dale Branch, an area sales manager with New American Funding based in Sugar Land, Texas.

Documents used to verify income for a mortgage

For many kinds of loans, lenders are required by law to ensure that borrowers can afford monthly mortgage payments before the lenders issue a loan. These laws were enacted to protect both lenders and borrowers from mortgages that could put either party at risk.

Lenders may request a variety of different documents to verify income, including earnings statements (i.e, paystubs), W-2 forms, and tax returns. They typically ask for 1099 forms from freelancers and independent contractors.

Verification of income (VOI) can get tricky due to the different ways that borrowers earn income.

“Some employees are salary or hourly, some are straight commission, and some are salary plus commission or hourly plus tips,” said Branch. “Lenders usually want to substantiate income for the past two years to verify consistency.”

Lenders usually have different VOI requirements for small business owners and self-employed individuals. That’s because they earn money from business activity, not a salary or wage that stays the same.

These borrowers may be asked to provide business tax returns, profit and loss statements, and balance sheets for the past two years.

Lenders may ask borrowers to use the I.R.S. Income Verification Express Service, which allows them to access tax return information directly from the Internal Revenue Service. This can help save borrowers time and effort during the application process.

How lenders verify employment for mortgage applicants

Generally, lenders will also want to verify that a borrower is employed and therefore has a steady stream of income. Again, this is to ensure that the borrower will be able to repay the loan.

For verification of employment (VOE), lenders may contact businesses directly to verify that borrowers currently work there and if they make the amount stated on the borrower’s mortgage application. Borrowers generally must sign a form authorizing employers to release employment information to lenders.

“Lenders may use automated systems to verify employment at large firms,” said Banks.

Meanwhile, lenders may ask self-employed individuals to file IRS Form 4506-T, Request for Transcript of Tax Return. This allows them to receive the borrower’s tax return directly from the IRS.

Lenders may also request that a borrower’s accountant verify a self-employed borrower’s income.

In addition, lenders will ask to see bank or investment account statements to document the financial assets that buyers have that they plan to use to cover the down payment.

These statements can also confirm payroll direct deposits, and other payments made to freelancers and contractors, as well as dividend and interest income earned by the borrower.

The risk of committing mortgage fraud

Submitting and verifying correct financial and employment information goes beyond helping to ensure that borrowers can afford to repay a mortgage.

“If the information on the application proves to be inaccurate, the borrower has committed mortgage fraud,” said Banks.

For example, if a borrower loses their job between the time the application is submitted and the loan closes, the borrower must inform the lender.

“A real estate agent once called me the day before a closing and told me the borrower was laid off,” said Banks. “I told the agent that the borrower would be committing fraud if they closed the loan the next day.”

The goal of this process

While some of these steps may seem a little confusing or even overwhelming for potential borrowers, these steps are part of a time-tested process that helps ensure people are able to use a mortgage to buy a home.

In many cases, these steps are required by law and exist to protect the borrower and the lender. The bottom line is that the mortgage process can be mutually beneficial and safe for both parties if all the necessary steps are taken.

Dale Branch NMLS # 235574