How Lenders Verify Income: Documents, Methods and What to Expect

Lenders verify your income through multiple documents and methods. W-2 employees need 30 days of pay stubs and 2 years of W-2s. Self-employed borrowers need 2 years of tax returns. Lenders also contact your employer directly through a Verification of Employment (VOE) and may use automated services to verify tax transcripts with the IRS. Never falsify income documents—lenders catch discrepancies and it’s federal fraud.

Standard Income Documentation

W-2 Employees

Document	Timeframe Needed
Pay stubs	Most recent 30 days
W-2 forms	Past 2 years
Tax returns	May or may not be required
VOE	Current employment

Self-Employed Borrowers

Document	Timeframe Needed
Personal tax returns	Past 2 years (all pages)
Business tax returns	Past 2 years (if applicable)
K-1 forms	If partnership/S-Corp
Profit & loss statement	Year-to-date
Business license	Current

Other Income Sources

Income Type	Documentation
Social Security	Award letter, 1099-SSA
Pension	Award letter, 1099-R
Disability	Award letter
Alimony	Court order, proof of receipt
Child support	Court order, proof of receipt
Rental income	Tax returns, lease agreements

Verification of Employment (VOE)

What It Is

A formal verification sent to your employer confirming:

• Employment status (active)
• Start date
• Job title
• Current salary
• Likelihood of continued employment

Methods Used

Written VOE:

• Form sent to employer
• HR or payroll completes
• Returned to lender
• Most thorough method

Verbal VOE:

• Phone call to employer
• Quick confirmation
• Often done near closing
• Supplements written verification

Automated services:

• The Work Number (Equifax)
• Verify (service providers)
• Instant verification from database
• Many large employers participate

What Employers Are Asked

Typical VOE questions:

1. Is this person currently employed?
2. What is their job title?
3. What is their start date?
4. What is their current salary/hourly rate?
5. How many hours do they work?
6. Is their position permanent?
7. What is the probability of continued employment?

Timing of VOE

Initial VOE:

• During loan processing
• Before approval

Final VOE:

• Right before closing (1-3 days)
• Confirms still employed
• Critical step—don’t quit your job!

IRS Tax Verification

Form 4506-C

What it is: Authorization for lender to obtain tax transcripts from IRS

Why it’s used:

• Verifies tax returns you provided are real
• Catches falsified documents
• Required by most lenders

Tax Transcripts

Types:

• Return transcript (shows most line items)
• Record of account (shows payments/balance)
• Wage and income transcript (shows W-2/1099 data)

Processing time:

• Often instant with automated systems
• Manual requests take 5-10 business days

What Lenders Compare

Your provided tax returns are compared to IRS transcripts:

• Income figures must match
• Discrepancies require explanation
• Major differences can derail approval

How Different Income Types Are Calculated

Base Salary

Calculation: Annual salary ÷ 12 = monthly income

Example:

• Salary: $85,000/year
• Monthly income: $7,083

Hourly Workers

Calculation: Hourly rate × average hours × 52 ÷ 12

Example:

• Rate: $28/hour
• Average hours: 40/week
• Monthly: $28 × 40 × 52 ÷ 12 = $4,853

Overtime Income

Calculation: 2-year average of overtime

Example:

• Year 1 OT: $8,000
• Year 2 OT: $10,000
• Monthly OT: ($8,000 + $10,000) ÷ 24 = $750

Requirements:

• 2-year history of receiving OT
• Likely to continue
• Some lenders want employer confirmation

Commission Income

Calculation: 2-year average

Example:

• Year 1 commission: $45,000
• Year 2 commission: $55,000
• Monthly: ($45,000 + $55,000) ÷ 24 = $4,167

Requirements:

• 2-year history minimum
• May need employer to confirm commission structure
• Declining income is a red flag

Bonus Income

Calculation: 2-year average

Requirements:

• History of receiving bonuses
• Likely to continue
• Employer may need to confirm bonus structure

Self-Employment Income

Calculation: Net income from tax returns, averaged over 2 years

What’s counted:

• Schedule C net profit (sole proprietor)
• K-1 income (partnerships/S-Corps)
• W-2 salary + K-1 distributions

Add-backs:

• Depreciation
• Depletion
• Some non-cash expenses

Example:

• Year 1 net: $95,000
• Year 2 net: $105,000
• Monthly: ($95,000 + $105,000) ÷ 24 = $8,333

Common Income Verification Issues

Problem: Income Doesn’t Match

Issue: Pay stubs don’t match W-2s or tax returns

Causes:

• Raise during the year
• Job change
• Calculation differences
• Errors

Solution:

• Provide explanation
• Document the reason
• May need employer letter

Problem: Employment Gap

Issue: Gap between jobs on resume

Causes:

• Layoff
• Medical leave
• Personal reasons
• Career change

Solution:

• Written explanation
• Documentation if applicable
• Current stable employment helps

Problem: Recent Job Change

Issue: Started new job recently

Concerns:

• Probationary period
• Income stability
• Different field

Solutions:

• Same field: Usually okay
• Different field: May need to wait
• Higher pay: Generally positive
• Offer letter helps

Problem: Declining Income

Issue: Income decreased year over year

Lender concern: Trend may continue

Impact:

• May use lower year only
• May average (hurts you)
• May require explanation

Solutions:

• Explain one-time factors
• Show recovery
• Provide documentation

Employer-Specific Situations

Large Companies

Advantages:

• Often in automated databases
• HR departments respond quickly
• Standardized processes

Small Companies

Challenges:

• May not have formal HR
• Slower responses
• Owner as employer may seem like self-employment

Solutions:

• Provide business documents
• CPA letter
• More documentation overall

Self-Employed / Business Owner

Challenges:

• Can’t verify employment traditionally
• Tax returns are key
• Income can vary significantly

What lenders need:

• 2 years tax returns
• CPA letter confirming business active
• Business license
• Bank statements (sometimes)

Gig Economy / 1099 Workers

Treated as self-employed:

• 2 years tax returns needed
• 1099s help document income
• Bank statements may supplement
• Need consistent history

What Lenders Can and Cannot Ask

Legal Inquiries

Lenders CAN ask about:

• Current employment status
• Job title and duties
• Start date
• Salary/wages
• Likelihood of continued employment
• History with the company

Off-Limits Topics

Lenders CANNOT base decisions on:

• Plans to have children
• Medical conditions (unless affecting employment)
• Age
• Race, religion, national origin
• Any protected class information

ECOA Protections

Equal Credit Opportunity Act prohibits discrimination. Income verification must be applied consistently regardless of protected characteristics.

Verifying Non-Employment Income

Social Security / Pension

Documentation:

• Award letter showing monthly amount
• 1099-SSA or 1099-R
• Bank statements showing deposits

Grossing up: If non-taxable, lenders may “gross up” by 15-25% to compare with taxable income.

Alimony and Child Support

Requirements to count:

• Court-ordered
• Received for 6+ months
• Will continue for 3+ years
• Proof of consistent receipt (bank statements)

Rental Income

Documentation:

• Tax returns (Schedule E)
• Lease agreements
• Rent rolls (if multiple units)

Calculation: 75% of gross rent counted (accounts for vacancy/expenses)

Investment Income

Documentation:

• Tax returns
• Brokerage statements
• Interest/dividend statements

Requirements:

• Consistent 2-year history
• Likely to continue
• Documented with statements

What to Avoid During Verification

Job Changes

Don’t:

• Quit your job during the process
• Change jobs without telling lender
• Go from W-2 to self-employed

Why: Final VOE will reveal changes, potentially killing the loan

Large Deposits

Don’t:

• Deposit cash without documentation
• Receive unexplained transfers
• Move money around erratically

Why: Large deposits require sourcing and documentation

Opening/Closing Accounts

Don’t:

• Open new credit accounts
• Close old accounts
• Shift money between accounts unnecessarily

Why: Creates questions and potential red flags

Frequently Asked Questions

What pay stubs do I need for a mortgage?

Most recent 30 days of pay stubs, covering the full period. If paid weekly, that’s 4-5 stubs. If paid biweekly, that’s 2-3 stubs.

Do lenders call your employer?

Yes. Lenders verify employment through Verification of Employment (VOE)—either by contacting your employer directly or using automated verification services.

Can I get a mortgage if I just started a new job?

Often yes, especially if you’re in the same field with similar or higher pay. New job in a different field or with probationary period may require waiting.

How do lenders verify self-employment income?

Through 2 years of personal and business tax returns. Lenders calculate net income from the returns and average over 2 years. They may also request IRS tax transcripts to verify authenticity.

What if my income varies month to month?

Variable income (commission, overtime, self-employment) is averaged over 2 years. Declining trends may hurt you. Rising trends are positive but still averaged.

Do lenders verify income after approval?

Yes. A final Verification of Employment is done 1-3 days before closing. Any significant changes (job loss, reduction) can stop the closing.

Can I use a job offer letter for income?

Sometimes. If you’re relocating or have a solid offer from a verifiable employer, lenders may accept the offer letter. You’ll likely need to start the job before closing or shortly after.