How does a lender verify income?

How does a lender verify income?

Buying a home is one of the most important and difficult steps many of us undertake as we try to get a foot on the property ladder. There are many parts to the process of buying a home, but one of the most important parts of obtaining a mortgage is going through the process of verifying income. It is important to remember the issue of verifying income can vary a little between different companies, but most use the debt to income ratio method.

Providing the correct documentation 

One of the first steps you will be presented with when looking to become prequalified for a mortgage is that of providing a lender with a series of documents related to your income. Lenders tend to ask for your last two paystubs showing total earnings to date to give an average of your current income. The majority of lenders will also ask you to provide W2 and tax returns for the past two years to gain an insight into your income history to decide if you are earning money over a prolonged period of time.

Why does a lender need this information? 

A lender wants to gain a solid overview of the income history of each person hoping to obtain a loan to make sure they are capable of paying the borrowed funds back. One of the most common ways a potential lender will make a decision about the possibility of approving a loan is through the debt to income ratio. This mathematic calculation gives the lender an overview of how much income is already being spent on the repayment of debt. Most lenders hope to keep this ratio at around 43 percent of the total income, but a well-qualified consumer may be able to obtain a mortgage with a 50 percent result.

The need to verify income is common in the mortgage application process and should not be feared. Getting your financial situation organized before starting the prequalification process is a good option to avoid any unforeseen issues.