How Lenders Evaluate Employment History

By: Patrick Boyaggi, CEO & Co-founder of RateGravity

Background

Lenders will require information from you about your current employer (and former, if applicable) in order to determine if you will qualify for a loan. The purpose is to confirm that you are currently employed and that your income is stable, predictable and there is a likelihood of continuity.

What You Need to Know

General Employment Requirements: If you have been with your current employer for less than two years, lenders will collect information on previous employers and your line of work to address income trends. In cases where you have not been with your current employer for two years, but have a previous work history (e.g. you were in school previously or took time off to be a homemaker), lenders will require documentation and/or a written explanation.

General Employment Income Information

Stable and Predictable Income:

The stable and reliable flow of income is a key consideration in mortgage loan underwriting. To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less predictable sources of income, the lender must obtain information about your prior earnings. Examples of less predictable/variable income sources include commissions, bonuses, and overtime pay.

Variable Income:

All variable income used for qualifying purposes must be reviewed to assess your history of receipt, the frequency of payment, and the trending of the amount of income being received.

History of Receipt:

Two or more years of receipt of a particular type of variable income is required in order to use that income to qualify.

Variable income that has been received for 12 to 24 months may be considered as acceptable income, if the lender deems there are positive factors in your profile to reasonably offset the shorter income history.

Frequency of Payment:

The lender must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income. If any differences exist between the current period variable pay and the year-to-date variable pay, the lender must investigate the difference and document the analysis before using the income.

Income Trending:

After your current year income amount is calculated, it must be compared to prior years’ earnings using your W-2’s or signed federal income tax returns.

• -If the trend in the amount of income is stable or increasing, the income amount will be averaged.
• -If the trend was declining, but has since stabilized and there is no reason to believe that you will not continue to be employed at the current level, the current, lower amount of variable income must be used.
• -If the trend is declining, your income may not be stable. Additional analysis must be conducted to determine if any variable income should be used.

Continuity of Income:

A key driver of successful homeownership is confidence that all income used to qualify the borrower(s) will continue to be received for the foreseeable future. If the income does not have a defined expiration date and the history of receipt of the income is documented, the lender may conclude that the income is stable, predictable, and likely to continue.

If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, the lender must document the likelihood of continued receipt of the income for at least three years.

Standards for Employment Documentation

General Documentation Requirements:

The lender must verify employment income for all borrowers whose income is used to qualify for the mortgage loan. This verification can be provided by the borrower, by the borrower’s employer, or in some cases, by a third-party employment verification vendor.

Employment Documentation To Be Provided:

Paystubs: The oldest of the two required paystubs must be dated no earlier than 30 days prior to the initial loan application date and it must include all year-to-date earnings. Additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained.

W2: IRS W-2 forms must cover the most recent two-year period. The W-2 forms must clearly identify the borrower as the employee. “Most recent” W-2 is defined as the W-2 for the calendar year prior to the current calendar year.

General Paystub and W2 Requirements:

• -Documents must be computer-generated or typed by the borrower’s employer(s). Paystubs that the borrower downloads from the Internet are also acceptable.
• -Documents must clearly identify the employer’s name and source of information.
• -The documents must clearly identify the borrower as the employee.
• -The information must be complete and legible.
• -The original source of the information must be a third party, such as the borrower’s human resources department, personnel office, payroll department, company’s payroll vendor, or supervisor.

Tax Returns: Personal federal income tax returns must be copies of the original returns, with signatures, that were filed with the IRS. All supporting schedules must be included. The lender will also obtain applicable transcripts of federal income tax returns. “Most recent” tax return is defined as the last return scheduled to have been filed with the IRS.

Employment Documentation Provided by the Borrower’s Employer:

If a lender cannot sufficiently document a borrower’s income, they will contact the borrower’s employer directly using a Request for Verification of Employment (VOE) or use a third-party service.

Lenders will need permission from the borrower, usually in the form of a disclosure, that authorizes the lender to obtain verifications of employment and income directly from the employer.