- The documents that an individual lender may require will vary. In most cases, lenders will ask for a copy of your latest monthly pay stub as well as a copy of your two most recent tax returns. According to Mortgage Mag, some lenders are now requiring that borrowers sign IRS form 4506-T, a form that gives the lending institution the legal right to request the actual IRS copy of the borrower's tax return. In theory, the documents would be the same as the borrower-submitted copies, but due to high foreclosures and mortgage application fraud, many lenders are taking extra steps.
- Lending institutions use income verification as a safeguard and check to make sure that a borrower will be able to pay the loan. By seeing how much money the borrower makes, lenders can then judge how much money he can afford per month on a loan. Banks also plug in the information into ratios known as debt-to-income ratios. One ratio involves housing expenses including principal, interest, taxes and insurance divided by gross income, while another involves all debt including housing divided by gross income. All of this information is used to judge the risk of a borrower and helps a bank make a decision on whether to extend credit.
- Lending institutions calculate based on gross or total income per month and many will include bonuses or commissions. According to Prime Lending, lenders will consider bonuses or commission by taking an average number based on the last two years, but only if those years were on the same job. Therefore it is usually best to wait until after you have closed on a home to change jobs. Changing before can damage your job history in the lender's eyes and it will mean that no bonuses would be calculated because you would not have been at the job for more than two years. Prime Lending notes that job changes for salaried employees or workers who do not earn bonuses or commission are not as big of a problem.
- Self-employed applicants and borrowers may have even more stringent verification requirements. According to Prime Lending, lenders look for a two-year history of self-employment income and usually lenders calculate the income by looking at the gross receipts after deductions. Prime Lending notes that a self-employed borrower should avoid changing her job type or the make-up of her company or business until she has closed on a loan. Changes can lead to verification problems and could require the applicant to wait another two years to count self-employment income.
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