Applying for a mortgage means providing every aspect of your financial life to the lender. Your income will be scrutinized in multiple ways, requiring a large amount of paperwork from you and verification of the information from third parties. Income evaluation has always been a crucial component of the mortgage application process as it is what determines your debt-to-income ratio and the likelihood ofyou defaulting on your loan. The next time you apply for a mortgage, be prepared to provide paystubs, tax returns, W-2s, 1099s and a document that allows the lender permission to perform a verification of employment.
Validating your Information
The largest reason multiple forms of verification of your income are required is to validate the information provided. Not every person who applies for a mortgage is a crook, trying to get by with getting a mortgage based on false information, but the lender has to prove it with multiple forms of income verification. For example, if a bank only required borrowers to provide their last two paystubs, it would be rather simple for anyone to make up their own paystubs with income amounts high enough to make them a better applicant. By requiring W-2s, tax returns and even tax transcripts direct from the IRS, the lender ensures the documents being reviewed are true and accurate.
Determining your Gross Income
Your tax returns paint a different picture than your paystubs or even your W-2s. Lenders require you to provide all schedules of your tax returns, enabling them to determine if you have any side work affecting your total income. It might seem like a good problem to have if you claim income for side work, especially if it is adequate enough to lower your debt-to-income ratio, but it comes with its downsides too. Lenders are looking for any expenses deducted on your taxes related to your side income or even your current job. If you claimed any unreimbursed employee costs or claim a loss on your side business, it directly affects your taxable income, decreasing your gross income. Since the gross income is the figure used to calculate your debt-to-income ratio, it will need to coincide with the income reported on your taxes, not just your paystubs.
Figuring your Total Rent Income
If you claim rental income as a part of your income on a mortgage application, you need to be able to provide proof. Your bank statements are not sufficient enough evidence because they do not reflect the expenses incurred as a result of owning a rental property. Your tax returns, on the other hand, will reflect any deducted expenses. This allows the lender to calculate your exact, positive rental income. If you do not claim rental income on your taxes, you will not be able to use it as a part of your income.
Providing numerous forms of income verification to your lender can seem frustrating, especially when it delays the processing of your loan, but it is in your best interest to provide the documentation beingrequested. Without proper documentation, you might end up in an unaffordable loan, putting the lender at high risk for a defaulted loan. The best way to prepare for a mortgage application is to provide your last 2 paystubs as well as W-2s and tax returns for the last 2 years. If you claim rental income or have a side business, you will also need to provide 12 months of bank statements to show the receipt of the income. In general, the more prepared you are for the processing of your loan, the faster the process will go for you.Click to See the Latest Mortgage Rates»