Today every loan program requires some type of income verification, whether that means paystubs and W-2s or two years’ worth of tax returns. The days of no verification loans are long gone, but that does not mean that mortgage loans are hard to obtain. Every lender has their own way of verifying income, but there is a general pattern that every lender uses to help you figure out just where you would stand in the mortgage approval process.
Start with the Basics
Most lenders will start with the basics, meaning they will inquire about your type of employment and go from there. Here is an example of what they will need:
- Salaried borrowers – If your income is fairly straightforward and you make the same amount of money each pay period you can generally provide paystubs that cover the last month along with the last 2 years’ W-2s for verification purposes. The lender will verify that your income is as stable as you say and will also verify your employment with the employer either verbally or with a written form.
- Commissioned borrowers – If your income fluctuates based on what you sell or how you do, then your income is less stable. In this case, paystubs will not work because they will not be an accurate reflection of your income. You might apply for the mortgage during an exceptionally good time of the year, making your income look inflated or during a slow time which will make your income look meager. Instead, the lender will require your paystubs along with your last 2 years’ worth of tax returns to verify your annual income.
- Self-Employed borrowers – Self-employed borrowers go through the same type of cycle that commissioned borrowers go through. The lender needs to verify the amount of money you claim to bring in as well as the expenses you write off. The lender can only use the income that you report to the IRS, which means if you write off a lot of expenses, your income might be lower than it is in reality. If you want to use the higher amount of income, you have to write off fewer expenses.
Providing the Documents to the Lender
Once you know what the lender requires for income verification for you, gather your documents and supply them to the lender. The loan officer will review the documents to see if anything sticks out to him that will get in the way of your approval. Sometimes the loan officer can see things that could be a problem before the documents ever get to the underwriter.
For example, if the bank statements and your tax returns do not seem to coincide with one another in regards to your receipt of income, you might have to provide more documentation to show that you actually received the income the tax returns state you received. Any type of discrepancy the loan officer or underwriter sees will need to be fully investigated and verified.
Cooperating with the Underwriter
Once the documents make it to the underwriter, he will start determining your risk level. If something does not add up, the underwriter will inquire about it and ask for more documentation. This can occur if you have a large number of written off expenses or if your tax transcripts from the IRS do not match the tax returns you provided to the lender. The best thing to do is cooperate with the underwriter, providing all extra documentation that he requests in order to get the process through faster.
Income Verification Procedures are Standard
Today, unfortunately, there are not very many lenders that will take your word for it regarding your income. Every lender will go through some type of income verification procedures to ensure that you make what you say you make. Some lenders might offer a more lenient program, such as a Bank Statement Loan that only requires you to provide bank statements to prove your income rather than your tax returns. These loans are often considered “subprime” and will carry a higher interest and/or higher fees. Any conventional loans that fall under the new Qualified Mortgage Guidelines will require full verification of your income with tax returns, paystubs, and W-2s along with any other information the underwriter requires.
The income verification procedures today are fairly similar to what they have always been with the exception of the need to double and triple check all numbers that are provided. This is why the underwriter will verify your employment with your employer outside of using the documents you provide as an extra layer of protection against risk in providing you a new loan.
As long as you provide the documents needed and know what to expect in terms of calculating fluctuating income, you should be able to get through the mortgage approval process fairly easily.