Income verification is a critical part of the mortgage approval process, helping banks determine whether customers have the financial stability to repay a loan. Traditionally, this process relied on borrowers submitting documents like pay stubs and tax returns.
However, modern solutions like Truv’s consumer-permissioned verification tools simplify the process, saving time and reducing errors. Learn more about how banks and lenders verify different types of income.
What Documents Are Required for Income Verification?
To verify income, lenders typically request the following documents from customers:
- Pay Stubs: Proof of regular wages.
- Tax Returns and W-2 Forms: A detailed record of yearly earnings.
- Bank Statements: Evidence of financial stability and savings.
These documents help lenders assess whether a customer has a consistent income and can make mortgage payments without jeopardizing their financial well-being.
For customers, gathering these documents can be time-consuming, especially if they need to request copies from employers or financial institutions. However, banks that use tools like Truv can streamline this step by allowing banks to securely access verified income data directly from payroll providers and financial accounts.
The Different Methods Banks and Lenders Use to Verify Income
Income verification methods have evolved significantly over the years, making the process faster, more accurate and less burdensome for both lenders and borrowers. Here are the key methods used by banks and lenders today:
- Traditional Verification: Traditionally, banks and lenders relied on customers to manually submit documents such as pay stubs, tax returns and bank statements.
- Third-Party Verification Services: Many banks and lenders now use third-party verification services to address the inefficiencies of manual verification. These platforms streamline the process by using digital tools, also known as instant databases, to verify income data quickly and accurately.
- Consumer-Permissioned Data Extraction: Automation has revolutionized income verification, with consumer-permissioned data extraction leading the way. This method allows customers to log in to a secure platform and authorize the sharing of their income information directly with the bank. Tools like Truv enable banks and lenders to access verified income data from payroll providers or financial accounts in real time, eliminating the need for customers to manually gather and submit documents.
By leveraging Truv’s technology, banks and lenders can significantly reduce the time and effort required for income and employment verification, enhancing the customer experience while maintaining accuracy and security. Truv’s consumer-permissioned data eliminates the hassle of gathering and chasing down documents. Customers can authenticate access to all their verification data digitally in 30 seconds on average.
How Banks and Lenders Verify Self-Employed Income
The income verification examples above are easiest when you have a steady job. If you’re self-employed, the verification process can be more difficult. As a self-employed individual, you don’t get pay stubs or W-2 forms from an employer, so you need to provide alternate sources of income data.
Your lender may request 1099 forms, business tax returns and profit-and-loss statements to help verify your self-employment income. It’s common for business income to fluctuate, so lenders often use a 2-year average to determine whether you qualify for a home loan. For example, if you earn $50,000 one year and $100,000 the next, your lender may average that out to $75,000.
For lenders, Truv simplifies the process by providing secure access to financial data, even for self-employed borrowers. By connecting directly to relevant accounts and platforms, Truv ensures lenders receive accurate and verified income data, reducing delays and manual workload.
How Do Banks and Lenders Handle Nontraditional Forms of Income?
Income verification for a home loan is also different if you have nontraditional forms of income, such as rental or investment income. Your lender may ask for additional documents to verify this income, including:
- Brokerage statements
- Bank statements showing your rental deposits
- Proof of rental property ownership (e.g., deed in your name)
- Schedule E (Part I shows your income or loss from rental real estate)
These income types can complicate the mortgage application process, as they often require more extensive documentation. Truv addresses these challenges by enabling lenders to verify income through bank transaction data. Instead of connecting to payroll providers, consumers connect to financial accounts, allowing them to share verified income data directly from the source, in real-time. This streamlines the approval process for non-traditional income earners.
Why Does Income Verification Matter in the Mortgage Process?
Lenders have one goal when it comes to performing income verification for mortgage applicants: to determine if a customer can repay a sizable loan. Income verification also affects your interest rate and other loan terms.
For example, if the verification process confirms you consistently earn a substantial income, you may qualify for a low interest rate. In contrast, a customer with self-employment income that fluctuates from month to month may have to pay a higher rate to account for the increased risk associated with lending them money.
Errors and omissions can delay your approval or cause a lender to deny your application. Therefore, it’s important to be honest and accurate when providing information about your income. Using tools like Truv ensures accuracy, speeding up the process for both customers and lenders.
Common Challenges in Income Verification
Income verification can present several challenges for lenders, particularly when customers provide inconsistent or incomplete documentation.
One common challenge is incomplete documentation. Customers may struggle to gather the necessary paperwork, such as pay stubs, tax returns, or bank statements, especially if they need to request copies from employers or the IRS. Traditional methods require waiting for these documents, which can take weeks and slow down the lending process.
Delays often occur when documentation is incomplete or lacks required signatures. For example, a missing W-2 form or an unsigned tax return can halt the approval process. Truv minimizes these risks by providing lenders with complete, verified data directly from trusted sources, reducing the likelihood of errors and ensuring the process moves forward smoothly.
FAQs
What checks do banks and lenders do?
Banks and lenders perform income and employment verification. Both checks help verify you’re able to repay a home loan. Employment verification also reduces the risk that you take out a loan and have no way to pay it back.
Do banks and lenders look at your spending habits?
In some cases, lenders assess your spending habits by reviewing the transactions in your bank statements. Reviewing previous transactions helps a lender determine whether you make debt payments on time. It can also help your lender spot concerning spending habits.
