Getting a mortgage without income and employment is possible, but very rare. The typical borrower has a job and consistent income. Just how do the lenders verify these things? We’ll discuss the process below. Knowing what to expect ahead of time can help prevent you from making any mistakes during the mortgage approval process.
If you tell a lender you have a job, they will verify it. There are two ways they can do it – written or verbal. A verbal verification of employment is usually saved for right before your closing. This is the 2nd time a lender may verify your employment. The first time they usually perform a written verification of your job. The Verification of Employment form helps lenders confirm the information you provided was correct. This is in addition to your paystubs and W-2s. It’s just a checks and balances system. It lets the lender know that your paystubs and W-2s are legitimate.
Lenders may also perform a verbal verification. This means they call your employer on the phone. They ask simple questions that require yes or no answers. They simply verify the information you provided. If the verbal verification is done right before closing, it is to make sure you still have the same job. This prevents borrowers from changing jobs after receiving their approval. Lenders want income that is consistent and long-term. If you change jobs right after approval but before the closing, it can change the dynamic of your loan.
Verifying your income relies mostly on the information you provide. You must provide lenders with your paystubs, W-2s, and possibly tax returns. The cases where you need tax returns are usually as follows:
- Self-employed borrowers
- Commissioned borrowers
- Borrowers employed by a family member
- 1099 income
- Foreign income
- K-1 income
The tax returns show lenders the full story regarding your income. For example, self-employed borrowers have more expenses. Lenders need to see what expenses you claim. Some are acceptable and won’t count against your income. Others, though, can hurt your bottom line. Expenses like depreciation are acceptable. Expenses like meal reimbursement or entertainment, though, may be taken right from your income.
Lenders will figure out your income on a yearly or even 2-year average. Borrowers that must provide their tax returns usually must provide 2 years of returns. This way the lender can average their income over 2 years; other borrowers, such as salaried borrowers, usually only have a 1-year average. However, most borrowers must provide their W-2s for 2 years. This helps lenders ensure that you make the same or more money over the years. If your income decreases, you’ll have more explaining to do.
If you are self-employed, a lender will verify your employment a little differently. Because you don’t have paystubs, W-2s, or an employer they must rely on another 3rd party. Typically, lenders prefer if you have an accountant handle your finances. This neutral 3rd party can verify what you report on your tax returns is honest.
If you don’t have an accountant or other 3rd party, the lender may use your business license and proof of your employment. In addition, they will request your tax transcripts from the IRS. They do this after requesting that you sign IRS Form 4506-T. This gives the lender access to your transcripts. They then compare them to the tax returns you provided to ensure the validity.
What can be a Deal Breaker?
There are certain things that can come up that could be a deal breaker for your loan. Basically, lenders look for the following:
- Employment you will have for the foreseeable future. They usually want to see at least 3 years of future income, but that might be hard to predict. At the very least, they want the employer to say that you are going to be employed barring any unusual circumstances.
- They listen for the employer to say anything about underemployment or unemployment. If you work a seasonal position, for example, this could be a deal breaker. This isn’t consistent income.
- Proof of the income you provided. Your paystubs and W-2s should match what the employer says. If anything differs, it is a red flag for the lender.
Deal breakers can occur even right before the closing. If you already have loan approval, don’t assume you can make changes. Lenders make sure everything is status quo. They make sure you did not take out any new loans or change jobs. Let’s say for example, you take out a new loan. The lender pulls your credit and sees it. They also verify your employment. Even though you have the same job and the same income, your debt ratio still changes. The lender must start the process over again.
This time they must include the new loan in your debt ratio. If you were borderline with your previous DTI, it could be a deal breaker for you. This is why you should leave everything as it is financially until you close on your loan. Once you close, you are free to make other financial decisions. Until that point, though, it is best to wait.
Verifying your employment and income may seem difficult, but it’s to protect you. The last thing you want is a loan you can’t afford. As long as the information you provide is accurate, there shouldn’t be a problem. Be prepared to explain any type of gaps in your employment as well. When lenders verify where you work, they will ask for dates of employment. If there is a time that you were unemployed, they will want a Letter of Explanation regarding the gap. They may also require more paperwork to prove your case. As always, be honest and provide any proof you have in order to make sure your loan is processed as it should.