How Do Mortgage Lenders Verify Income?

Last Updated on 06/02/2017 by GS Staff

Q:

How do lenders verify income?

A:

The way lenders (underwriters) verify income depends on the source of income. A person who is self-employed will provide different income documentation from a person who is a not self-employed. There are also people who qualify for a loan without employment income at all. These people might have income sources such as social security or dividend income. Let’s take a look at how some sources of income may be verified by a lender.

Salaried or Hourly

A person who is not self-employed usually has the ability to provide the lender with paystubs and W-2s to verify income. A common requirement is for the borrower to provide the most recent paystub reflecting at least 30 days year-to-date income and the most recent W-2. The lender may also call the employer to verify the borrower’s position and dates of employment.

In lieu of the paystubs and W-2, a Request for Verification of Employment (Form 1005) can be provided. This form is completed by the borrower’s employer and discloses the year-to-date income and the past two years of income. The form breaks down the income by the type of income received by the borrower such as salary, overtime, commission, and bonus. Since this is a handwritten document, lenders like to request the tax request transcripts to verify the past two years income reported on the form. They may also call the employer and verify the information reported on the employment verification form.

Overtime, Commission, Bonus

Lenders often require that a borrower have a history of receiving income sources such as overtime, commission, and bonus. For example, if a person receives bonus income, the lender may request the current paystubs and the prior two years W-2s to support the bonus income. Another requirement may be for the employer to provide a completed Request for Verification of Employment (Form 1005) reflecting the current year-to-income (including bonus) and the prior two years income (including bonus).

Self-Employed Income

Verifying self-employed income is typically a bit more complex for lenders. The general requirement is often the most recent two years personal tax returns accompanied by the most recent two years business tax returns for businesses such as S corps, corporations, LLCs, and partnerships. In some cases only one year of tax returns may be required. Additional, business returns may not be required. Lenders often verify the tax returns with tax return transcripts obtained from the IRS.

Social Security

Social security is generally verified by obtaining a social security award letter and/or proof of current receipt. The lender must also document three years of continuance if the borrower is not of retirement or is drawing benefits from another person.

Alimony & Child Support

This income is often verified by the divorce decree, separation agreement, or an other similar legal document. The documentation should reflect the payment to the borrower and evidence that the income will continue for the next three years or more.

Final Note

The above income verification documentation does not apply to all lenders. Some lenders may require more or less documentation to verify income based on their guidelines or other circumstances surrounding the loan. Check with your lender or a mortgage professional familiar with your situation for the latest income verification requirements.