Income verification is a vital part of the mortgage process, or any loan process, that is. It is necessary to help lenders mitigate risk and determine which applicants have the financial means and capacity to pay for the money they will owe.
Lenders are as diverse as their income and eligibility requirements. What one considers as “income” may not be for another lender. There are various parameters that lenders look for in an income. Let’s take a closer look at these.
The most common type of income is salary for employed borrowers. You either receive your salary on a weekly, bi-monthly, or monthly basis, at a predetermined amount. Depending on how often you receive payment, the lenders will require you to submit a copy of your pay stubs for at least the past two months. The lender will use your pay stubs to calculate your gross annual income, on top of evaluating your credit report and your DTI or debt-to-income ratio.
Bonuses and Commission
Unlike salary that is fixed in amount, bonuses and commission can also be considered as income by some lenders despite its inconsistent nature. However, it will only qualify if you are able to demonstrate that you have been receiving this form for income for at least two years – and will continue to do so in the future. Because they are not fixed, these numbers will be annualized, meaning the lender will average the amount you receive in a certain period of years and not take the numbers you get per year individually.
In case of the self-employed, you can use tax returns in place of the pay stubs for income verification. If you are planning to get a mortgage and are currently self-employed, you might want to suspend writing off too many expenses so your tax records will be more reflective of your income. For stated income loans, you can also use bank statements to qualify.
Social Security and Disability Income
An award letter will be warranted by the lender as proof that you are indeed receiving social security and disability fund from the government. You must also be able to prove its receipt through bank statements for 12 months. This will show the lender how much money you are receiving which can then be counted by the lender as income. However, additional documentation must be given to show that you will be receiving said form of income for at least the next three years. This assures the lender the continuity of monetary receipt from which the borrower can get the money to repay the mortgage.
Child Support and Alimony
If you think your income is not sufficient to qualify for a mortgage, you can use your child support and alimony as an additional source of income. To utilize this, you must submit: a) a court-ordered divorce decree or child custody agreement b) bank statements showing receipt of said funds c) proof of how long you will be receiving the income. Like the social security and disability income, you must be able to demonstrate that the income will continue for at least the next three years, which might not be the case if your child is already 17 at the time of application.
What is okay for one lender may not be for the other. However, they are not usually far off. What is universally considered by these lenders are the longevity and consistency of your income. That is why the more consistent your earnings are, and the longer you’ve had the job, the better. But that does not mean it’s impossible to get approved otherwise. Take time to shop around and inquire to find the right match for you.