Mortgage Underwriters: Employment Verification Process Explained

Mortgage underwriters verify employment to ensure that applicants can afford to pay back their home loans. This process is crucial in determining a borrower's creditworthiness, reducing the risk of fraud, and ensuring that the loan will be repaid. To verify employment, underwriters typically contact the applicant's employer directly and review income documentation, such as pay stubs, tax returns, and bank statements. Self-employed individuals may need to provide additional documentation, such as an Internal Revenue Service (IRS) Form 4506-T, to verify their income. This process can be facilitated by the borrower signing a form authorizing their employer to release employment and income information to the lender.

Contacting employers directly

Mortgage lenders will usually verify your employment by contacting your employer directly and reviewing recent income documentation. This is a crucial step in determining a borrower's creditworthiness, reducing fraud risk, and ensuring that the loan will perform. The borrower must sign a form authorizing their employer to release employment and income information to a prospective lender. The lender will then typically call the employer to obtain the necessary information.

Most lenders only require verbal confirmation, but some will seek email or fax verification. Lenders can also verify self-employment income by obtaining tax return transcripts from the IRS or requesting attestation by a certified public accountant (CPA). In some cases, lenders may also request regulatory filings or check licensing bureau databases.

It's important to note that lenders must call your employer on a phone number that can be verified by a third party, such as Google, to meet government and investor regulations. This can sometimes present difficulties, especially when dealing with small companies or nonprofits that may not have a website or easily accessible contact information.

To facilitate the verification process, borrowers can inform their employer's human resources (HR) department of their need for verification. Some companies will not release employment-related information without the employee's permission, which helps protect sensitive information such as salary details.

Reviewing income documentation

The income documentation requirements for mortgage applications can vary depending on the applicant's employment status. For example, self-employed applicants may only need to provide bank statements and tax returns, while traditionally employed applicants may also need to provide W-2 forms and pay stubs.

Regardless of employment status, the purpose of reviewing income documentation is to determine whether the applicant's income is adequate for loan approval and whether they are steadily employed. Lenders typically require a front-end debt ratio (housing payment compared to gross income) in the low 30% range and a back-end debt ratio (total monthly debt payments, including housing, compared to gross income) of no higher than 45%flexibility depending on the borrower's overall credit profile.

Lenders will also use income documentation to verify the applicant's employment. This can be done by calling the employer or scanning a database. Some lenders may also use VOE software to streamline this process. Lenders will typically verify the applicant's employment early in the home loan process and again at closing.

Applicants should be aware that providing false information on a mortgage application can have serious consequences. Mortgage lenders are required to thoroughly vet borrowers to ensure they have the capacity to meet their monthly mortgage obligations. By taking the time to verify employment and income, lenders can cut down on fraud and ensure that only creditworthy borrowers are approved.

Calculating debt ratios

When it comes to buying a home, one of the most important numbers on your mortgage application is your debt-to-income ratio (DTI). Lenders use your DTI ratio to understand your financial health and to gauge how much of your income goes toward paying off debts and how much room you have for a mortgage payment.

There are two main types of DTI that underwriters consider:

Front-End DTI

This represents the portion of your earnings dedicated solely to housing costs, including your new mortgage payment, property taxes, and homeowners' insurance. Lenders typically require a housing expense ratio of approximately 28% or less. However, a higher housing expense ratio may be acceptable if you have compensating factors such as an excellent credit history or a low loan-to-value ratio for the property.

Back-End DTI

This considers all monthly debts, including housing expenses, credit card payments, car loans, student loans, alimony, child support, and other recurring debt obligations. Lenders generally look for a back-end DTI of no higher than 36%.

Calculating Your DTI

To calculate your DTI, you need to divide your total debt figure by your income. First, add up all your monthly debt payments, including your projected monthly mortgage payment. Then, divide that number by your monthly gross income (your income before taxes and other deductions).

For example, if your debt costs $2,000 per month and your monthly income is $6,000, your DTI is $2,000 / $6,000, or 33%. Lenders prefer a DTI under 50% for conventional loans, with different limits for various loan types.

If your DTI exceeds the lender's guidelines, you can take steps to bring the percentage down by increasing your income, paying down your debt, or considering a less expensive home. It's important to note that your DTI ratio is just one of many factors that lenders consider when reviewing your mortgage application.

Verifying employment history

Lenders verify employment history by contacting employers directly and requesting income information and related documentation. Most lenders will accept verbal confirmation, but some may require email or fax verification. They will also review income documentation, such as W-2 forms, pay stubs, bank statements, and other financial documents. For self-employed individuals, lenders often require additional documentation, such as tax returns or an Internal Revenue Service (IRS) Form 4506-T, which allows them to obtain tax returns directly from the IRS.

To facilitate the verification process, borrowers must sign authorisation forms permitting their employers to release employment and income information to the lender. This step is crucial, as some companies will not disclose employment-related details without the employee's consent to protect sensitive information. Additionally, borrowers can provide supporting documentation, such as recent pay stubs, tax returns, and business licenses, to supplement the verification process.

In some cases, lenders may utilise third-party data solutions or outsourced providers for employment verification. This is especially relevant for "gig economy" workers, as their employment situations can be dynamic and require up-to-date information. Lenders must also be vigilant against fraudulent activities, as there have been instances of fake companies being set up to deceive mortgage lenders.

Detecting fraud

The verification of employment is a crucial step in the mortgage underwriting process. It helps determine a borrower's creditworthiness, reduces the fraud risk, and ensures the loan will perform. Lenders must thoroughly vet borrowers to ensure they have the capacity to meet their monthly mortgage obligations.

Fraud detection methods include:

• Calling the employer: Lenders or underwriters call the employer to confirm the borrower's employment and income details. They must use a phone number that can be independently verified by a third party, such as Google. This step ensures that the company and the employment are legitimate.
• Reviewing income documentation: Lenders request and scrutinize income-related documents, such as W-2 forms, pay stubs, bank statements, and tax returns. They look for inconsistencies or discrepancies in the provided information. Discrepancies can be a red flag for fraud and impact the borrower's debt ratios and loan approval.
• Verifying employer legitimacy: Lenders check the authenticity of the employer by cross-referencing their information with third-party databases, licensing bureaus, or professional reference services. This step helps identify fake companies set up to deceive lenders.
• Using VOE software: Some lenders employ Verification of Employment (VOE) software to streamline the process and automatically request employment and income information from the employer. This technology aids in detecting discrepancies and reducing the potential for fraud.
• Analyzing employment history: Lenders review the borrower's employment history to identify a stable career track. They look for consistent employment, job stability, and a history of earnings to ensure the borrower can maintain employment and make timely mortgage payments.
• Outsourced verification: For borrowers in the "gig economy," lenders may use outsourced or third-party VOE services to obtain up-to-date employment information due to the dynamic nature of their work.
• CPA verification: For self-employed borrowers, lenders may request attestation by a certified public accountant (CPA) to confirm income, in addition to obtaining tax returns directly from the IRS.

By employing these methods, mortgage lenders and underwriters can effectively detect and mitigate fraud risks, ensuring that only creditworthy borrowers are approved.

Frequently asked questions