Most real estate agents will not spend much time working with a potential buyer unless they have already received a pre-approval offer from a lender. However, in order to attain a pre-approval offer, lenders will require you to verify your income and assets. This verification process can often be done online. Or, if you're working with a local lender, you'll need to bring your documents into the office for review. Basically, this verification process ensures that you have the money needed to purchase a home.
The income and asset information you provide to the lender will help them determine the offer's maximum value and the estimated interest rate. This may seem like another hoop to jump through when you just want to get into a new home as soon as possible, but in the end, it will actually provide great benefit to you. Your lender doesn't want you to get a monthly payment you can't afford because they ultimately want you to pay the loan back in full.
At the same time, you shouldn't want to get a monthly payment you can't afford because that would put you in a detrimental financial situation. So, as the lender is verifying the information you have provided to them, they will make some calculations to ensure the home you purchase fits within your monthly budget. If it has come time for you to have your income and asset information verified, however, it can still turn into a headache if you aren't properly prepared.
What does income verification mean?
Income verification is just what it sounds. The lender wants to see how much money you’re making each month to help determine how big of a monthly payment you can afford. To confirm your monthly income, you'll need to send them certain documentation. They'll want to see:
- Two years of W-2s
- Two years of your federal tax returns
- Two of your most recent pay stubs
Having a record of your most recent bank statements (checking and savings) will also be beneficial. Additionally, the lender will want to take a look at your monthly debt obligations and any outstanding loans, like your monthly car payment. Your most recent credit card statements may also need to be looked at, so bring them along to be certain.
If you’re a self-employed individual, you’re likely to face some additional hurdles in acquiring financing for your home, but don't be discouraged! Because you’re not issued a W-2, you'll need to provide supplemental documentation about your income source and your average monthly income amount. If you have long-term clients or if you’ve been doing your self-employed work for some time (2+ years), you’ll have a much easier time because the bank will be able to see that you have stability in your self-employment.
Lenders will ask for various supporting documents from self-employed individuals, but you should try to provide them with another supportive documentation as possible. This might mean a collection of your most recent invoices to your biggest clients in place of pay-stubs. You'll need to bring in at least two years of federal tax returns as well, but you may want to bring in one for each year that you have been self-employed to help show the stability of your employment.
Bank statements, asset information, and savings account statements will also be very beneficial.
The Verification Process
If you are traditionally employed, the lender may ask for your employer's contact information so that they can verify the information on the W-2s and pay stubs you have provided them.
For self-employed individuals, quarterly or year-to-date profit/loss statements from the past two years (both business and personal income related) will help you verify your income levels. If you are unsure what exactly a lender will want to see, bring extra documents and offer them, or give them a call ahead of time and let them know you're self-employed.
When it comes to verifying assets, your lender is going to go through a quick process to check the overall value of your assets. These are things you own out-right and could potentially sell to continue covering your expenses in the event that you lost your job or became unable to work. Some examples of assets are things that have a cash value or could be easily converted into cash (which are known as "liquid assets"). A savings account would be a liquid asset with a cash value. A stock would be a liquid asset that can easily be converted into cash (by selling it).
Some examples of documentation that can support the verification process for liquid assets include checking account statements and savings account statements, CDs, stocks, mutual funds, bonds, IRAs.
Moreover, if you happen to have non-liquid assets, like a self-owned business, jewelry or artwork, that can also be beneficial. However, these assets are considered non-liquid because they are harder to liquidate quickly in an emergency situation. Recreational vehicles, a car that you own, or a piece of property you own are all examples of non-liquid assets that you could sell for cash if you needed to. Being able to present documentation (car titles, etc.) about these assets and their current value will increase your chances of getting a loan.
6 Months of Savings Rule
Most lenders suggest that you have enough liquid assets to cover around 6 months' worth of expenses in case a financial issue occurs.
As an example, you may have $20,000 tucked into a savings account, giving you enough to cover 10 months' of expenses (assuming you have $2,000 in monthly expenses). Or, you may own a vehicle that's worth $12,000, which is enough to cover 6 months' worth of expenses (assuming you have $2,000 in monthly expenses). Both of these assets would be acceptable to your lender's 6-month savings requirement. However, not all lenders expect this.
Did you find this article helpful? Horizon Lending Services provides loans, including VA and FHA loans, to homebuyers.