The term income verification may sound like a method used to prove earnings for loans or rent payments. But income and employment verification isn’t a linear path in all cases, and you may occasionally need to show you don’t, in fact, make what you used to.
Documenting loss of income can be fundamental to important loan activities or other applications. As the job market fluctuates, more Americans may face this process. While unemployment is still down from its peak in 2020, as of September 2024, it’s up year-over-year. The unemployment rate reported by the Federal Reserve in September 2023 was 3.8%, and in September 2024, the rate was 4.1%.
This article identifies situations in which you might need to use income and employment verification processes to show a loss of income and how to do so effectively.
Why You Might Need to Show Loss of Income
Common reasons for income verification include mortgage or auto loan, rental and job applications. But income and employment verification can also mean demonstrating current income to show eligibility for other programs and opportunities, including those that might be more relevant if you have a loss of income. Some reasons you might need to prove loss of income are:
- Financial assistance: If you’re applying for financial assistance of any type after a change in income, you may need to show the recent change leaves you with less disposable income. This is especially true when programs use last year’s tax returns to make decisions, as you may need to demonstrate circumstances have changed since you filed.
- Loan modifications: When income loss means a struggle to pay your bills, lenders may provide some relief. However, before they approve a modification to your monthly payment, you must prove income loss.
- Mortgage or student loan forbearance or deferment: Mortgage and student loan companies may put your payments on pause if you can qualify for these programs due to income loss.
- Unemployment insurance or other benefits: Many insurance and government organizations consider income a deciding factor in approval processes.
Self-employed individuals and freelancers may undergo a more complex process to demonstrate income loss. You may need to show your previous income and demonstrate whether it’s lower due to changing market forces or other causes.
Types of Documents to Show Loss of Income
Some income verification example documents include:
- Pay stubs: Your paycheck stubs demonstrate your earnings over time and can help show that your income is trending down. For example, if your employer cuts your hours, your check stubs should display the drop in pay.
- Bank statements: Bank data can help you show how incoming payments from employers or clients have dropped.
- Tax returns: Tax returns can reveal your income dropping over longer periods.
- Profit and loss statement: Self-employed individuals can use their business profit and loss statements to show income changes over quarters or months.
- Unemployment benefits documentation: If you lost your job, your unemployment benefits details help prove your income is less than what you earned in that previous position.
How to Present a Clear Case for Income Loss
Leverage best practices from income and employment verification processes to demonstrate your income loss. Some steps to take include:
- Gather detailed records. Collect as much relevant documentation as possible to create a comprehensive picture of income changes. This might include paycheck stubs, bank statements, tax records and emails from your employer or clients about changes in positions or projects.
- Write an explanation letter. Write a letter explaining your income loss, including the reason, timeline and impact on your household finances. The lender or agency may not understand the income loss and impact from the data alone.
- Seek employment verification. Use formal processes to have your employer confirm the change in income.
- Use digital tools. Platforms like Truv can help expedite these processes through customer-permissioned access to income records, which can immediately show you don’t make as much as you previously did.
Challenges for Self-Employed Individuals and Freelancers
Self-employed individuals and freelancers may not have access to paycheck stubs and traditional income verification documents. Instead, they may need to rely on business financial records, such as invoices, client contracts and tax filings, to demonstrate their income. For example, if you have an average of $8,000 in invoices every month for two years and the last quarter, your invoices averaged $5,000 per month, this indicates your income is down.
For this reason, it’s important to keep updated records regarding income and expenses for your freelance or contract business. You may need access to income trends when applying for financial products or assistance. Digital accounting tools can help you track income in real time for easy access to reporting.
How Truv Simplifies Employment and Income Verification
Truv employment verification allows individuals to share employment and income data for verification purposes – in 30 seconds, on average. Quick access to direct-to-source data (direct-to-payroll providers) reduces the paperwork involved, and the secure platform keeps data safe as you complete application processes. Truv connects over 2.3+ million employers, 92 payroll providers, and covers over 96% of the US workforce, making it easy to verify income for the majority of the US workforce.
Explore Truv’s digital verification solutions to get more information and find out how to create seamless experiences when verifying income for any reason.
FAQs About Showing Loss of Income
What Is Proof of Income for Income Verification?
Proof of income typically means third-party documents that back up your income claims. They can be bank statements, paycheck stubs, letters from employers or tax documents.
What if You Have No Proof of Income?
If you have access to employee verifications, you can usually get proof of income from your employer. If you are a freelancer or self-employed, you may need to provide your own documentation. You can create proof of income with copies of bank statements and other financial documents.
