How does income verification work?

By Gina Freeman

Reviewed by James Heflin

Dec 06, 2023

Read time: 5 min

Family at home reunited in the kitchen in the morning while parents doing home finances

Key takeaways:

  • Lenders require income verification because they don’t want to approve a loan you can’t afford.

  • Modern technology allows lenders to verify income from many employers electronically.

  • If you receive your income in cash, you should be able to prove it with bank statements or tax returns.

Picture this. You're stepping up to a new financial opportunity when you're met by a gatekeeper: income verification. It might sound like a piece of red tape, but it's actually a key that can open doors to the financial milestones you want to reach. Verifying your income is the lender's way of saying, "Yep, we think you've got this."

Think of income verification as your financial resume. It showcases your earnings and tells lenders that you're a qualified contender for the credit product you want (a mortgage, a personal loan, a car). By verifying your income, you're building a bridge of credibility with your lender. It's a step toward where you want to be, and if you have income, it's nothing you can't handle.

Why do lenders require income verification?

Before giving money to you, lenders want to know you can pay them back. 

Your credit score tells them how you've managed debts in the past. However, it doesn't tell them whether you can cover your current expenses and make the payments on the loan you want. So lenders verify your income. 

In the case of mortgages, lenders require proof of income because it's the law. It's called the ATR, or Ability to Repay rule, and it was put in place to help people avoid home foreclosures. A home equity loan is a type of mortgage, so expect the lender to require proof of income as part of your application. 

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What documents do you need to prove your income?

The documents you need for income verification depend on how you earn your money, your lender's policies, and the type of loan. In general, mortgage lenders require more income documentation than personal loan providers. That's because mortgage loan amounts tend to be higher than other loans and because mortgage lenders carefully follow the ATR.

Here are some examples of documentation you might be asked to provide for income verification:

  • Nothing! If you're a W-2 employee and your employer allows it, the lender may be able to verify your income electronically. Modern technology is making this more common. 

  • One or two of your most recent pay stubs showing year-to-date income. This is a typical requirement for W-2 employees. 

  • W-2 forms for up to two years. This is more likely if you've changed jobs in the last couple of years, or have multiple jobs. 

  • Signed Verification of Employment (VOE) form. You sign the form and the lender sends it to your employer for completion. The form contains your start date, and asks for confirmation that you're still employed and in good standing. It also requires the employer to indicate your current income, and if any income changes are pending.

  • Tax returns with all schedules and forms. Expect this if you're self-employed or a significant part of your earnings comes from investments, commissions, or bonuses. 

  • Bank statements. You might use bank statements to prove your income in some cases. For instance, if you receive alimony, child support, pension, dividend, rent, or some other kind of income, the lender may be able to verify it by looking at your bank statements. Bank statement mortgage programs exist for self-employed borrowers who don't have pay stubs from an employer. 

Income verification requirements vary among lenders and loans, especially for personal loans. An applicant with a high credit score who wants to borrow $1,000 may encounter a very different process than someone with average credit applying for a $100,000 loan.

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How important is income for loan approval?

Income is an important eligibility factor because the lender needs to know if you can afford the loan. For higher loan amounts, you need to show more income. Your income alone isn't usually the deciding factor in most lending decisions. However, some personal loan providers set minimum income eligibility requirements ranging from under $20,000 to $100,000.

Your income is only part of the equation. The lender will compare it to your debt to determine if you have enough money to afford the payments on the loan. To analyze the relationship between your income and your debt, lenders use your debt-to-income ratio or DTI. This is how they calculate it:

  • Add up your monthly housing expenses and your required monthly debt payments (including the new loan you want).

  • Divide that total by your gross (before-tax) monthly income. 

Achieve's DTI calculator can quickly show you your DTI and how much you might realistically afford to borrow. 

Most lenders set a maximum DTI, often between 36% and 50%.

How to prove unusual income

Some types of income are harder to verify, including self-employment and less-usual income such as child support or cash payments you get from your roommate for the rent each month.

Most people with income that's harder to verify should plan to rely on bank statements or tax returns. Besides bank statements, self-employed people can prepare year-to-date financial statements or a profit and loss statement.

When you receive payments, don't lump them in with other bank account deposits. Deposit them separately into your account. Keep a journal of cash payments. Keep a copy of the checks you deposit. 

When you perform odd jobs, give your customer a receipt for payments to you and keep a copy. Deposit that money separately into your bank so the deposit amount matches the receipt. If you receive your income in cash and you never deposit it or claim the income on your tax return, you'll have a harder time proving your income to a lender. 

If you are struggling to prove your income, talk to a loan officer about your options. For every source of income, the lender wants you to show that you're entitled to receive it, that you do receive it, and that you'll continue to receive it. Borrowers have been known to prove income in unusual ways. Explain your situation. Your lender may be willing to work with you to brainstorm ways to verify your income. You could also consider applying with co-signer or co-borrower who can document their income. Tips for a smooth income verification process

Before applying for a loan, start organizing your income. Good records are key to getting credit for all of it. 

Income verification can be challenging when you don't receive a check with the usual payroll information on it. Whether your money comes from an employer, customer, former spouse/partner, pension plan, or another source, make sure you have a document that explains where it came from: a lease, contract, award letter, court decision, profit and loss statement, etc. And then prove that you receive the income reliably by depositing it into your bank and keeping good records. 

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

The most common documents requested are:

  • Your most recent 2-4 weeks of pay stubs showing your year-to-date income

  • Your W-2s or tax returns for the last two years  

You might be able to qualify for a bigger loan if you have more verifiable income. For instance, a mortgage lender will look at your income and your financial obligations to figure out how much of a monthly payment you can afford. That tells them how much you could potentially borrow.

Not a mortgage or home equity loan, but possibly other kinds of loans. There are some online personal loan lenders who offer no-income loans. Some secured loans don’t require strict income verification because the collateral lowers the lender's risk. For instance, a car loan lender might ask about your income but not verify it.

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