Homeownership is among the most significant investment decisions most people have to make.
Unfortunately, most people can’t afford to pay for a home upfront, making a mortgage the most viable option for many.
According to the Federal Reserve Bank, Americans carried a total mortgage debt of $11.39 as of July 2022, representing a $945 billion increase from the previous year. This shows a continued increase in borrowing despite the cooling housing market witnessed in recent years.
But Do You Need to Prove Your Income When Seeking a Mortgage?
Mortgage lenders are profit-making businesses. So before they can approve a mortgage, they want to ensure they will recover their money and make a profit. In other words, lenders always want proof of income to guarantee you can service your mortgage.
When determining your ability to repay a loan, a lender will request various proof of income documents, which may differ based on whether you are employed or self-employed.
Here are several documents you may need to provide as proof of income when seeking a mortgage:
Paystubs
In some states, employers are required to provide their employees with pay stubs. A paystub, also known as a pay slip or pay statement, is a document issued to an employee at the end of a pay period and provides a breakdown of their pay, including their gross pay, deductions, and net pay.
It also includes the hourly rate, hours worked, overtime pay or bonuses, taxes, employee benefits, etc. Pay Stubs are generally accepted as proof of income, so consider asking your employer for one when seeking a mortgage.
If your employer does not issue pay stubs, or you are an independent contractor or business owner, you can use an online paystub maker to create one. However, it is vital to note that some lenders may not accept online-generated paystubs, so if you have to use one, you may need to provide additional documentation to verify the information.
Bank Statements and Assets
If you do not have pay stubs or your employer deposits money in the bank directly, your bank statements and assets may be the next most acceptable option for proof of income.
Lenders will request current bank statements and proof of ownership of your properties. Lenders will want to see statements from a few months back to ensure you have enough to service your loan for several months in case of an emergency that keeps you out of work.
They will also want to see that your down payment has been in your account for some time before seeking a mortgage and may disapprove if the downpayment appears in your account suddenly. Using bank statements as proof of income works for both the employed and the self-employed.
Tax Documents
Tax records are legal documents and are among the most reliable proofs of income. If you are employed, your W2 will be the best option. The employer issues a W2 to the employee at the end of every calendar year for tax purposes. It provides a breakdown of the employee’s wages, employer contributions, and statutory deductions withheld by the employer for the year.
If you have additional sources of income from a side hustle or are self-employed, Form 1040 is the standard for filing your taxes and is acceptable as proof of income.
If you have non-wages sources of income, you will need to file a Form 1099 with the IRS. Like other tax forms, Form 1099 can work as proof of income. There are several Form 1099s, depending on what you are reporting.
For dividends and distributions, you will need to file Form 1099 DIV. Form 1099-INT applies when reporting interest income, and Form 1099-MISC for miscellaneous income such as self-employment or freelance income, income from rentals, prizes, and awards. If you receive government payments, such as unemployment compensation or state tax refunds, you will need to file a Form 1099-G.
Credit History
Your credit history plays a significant role in determining your creditworthiness and the interest rates on your mortgage. When assessing you as a borrower, a lender will pull your credit report from a credit reference bureau with your verbal or written permission.
Blemishes on your reports, such as a short sale or a foreclosure, can affect your creditworthiness but do not always disqualify you. In most cases, lenders will allow you to explain the blemishes in writing, which helps them evaluate the risks you pose.
Lenders may not be too hard on a single blemish, but the same may not be said of habitual delinquency. If you hope to apply for a mortgage in the future, improving your credit score beforehand is best, as it can help improve your creditworthiness.
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