Do Underwriters Call Your Employer?
Understand how lenders verify your employment and income during the loan underwriting process, including common methods and what information they seek.
When you apply for a loan, the lender undertakes a process called underwriting. Underwriting involves a thorough evaluation of your financial profile to determine the risk associated with lending you money. This process assesses your ability and willingness to repay the debt, ensuring the loan aligns with your financial capacity and the lender’s risk tolerance. A key aspect of this assessment involves verifying your employment and income.
Why Employment and Income Verification is Necessary
Lenders verify employment and income to gain confidence in your financial stability and ability to make loan payments. This verification helps them assess your debt-to-income (DTI) ratio, which compares your total monthly debt payments to your gross monthly income. A primary indicator of your capacity to manage additional debt, the DTI ratio helps prevent undue financial strain.
Confirming your employment and income also mitigates the lender’s risk of default. By ensuring the information you provide on your loan application is accurate, underwriters can make informed decisions about loan approval and terms. This due diligence helps protect the borrower from taking on unmanageable debt and the lender from potential losses. A verified income stream demonstrates a stable financial foundation.
How Underwriters Verify Employment and Income
Underwriters employ several methods to verify an applicant’s employment and income, and directly contacting an employer is a common practice. Lenders often reach out to an applicant’s human resources (HR) department or payroll office to confirm details such as current employment status, start date, and job title. These inquiries are typically brief and focus solely on factual employment information, avoiding discussions about the loan application itself.
Another frequent method involves the use of Verification of Employment (VOE) forms. These standardized forms are sent to the employer, who then completes and returns them directly to the lender. The VOE form typically requests specific details, including the applicant’s employment dates, position, and current salary or wage. This formal documentation provides a verifiable record of employment.
Underwriters also rely on financial documentation provided by the applicant. This includes recent pay stubs, W-2 forms for the past two years, and sometimes bank statements to confirm direct deposits. For additional verification, lenders may request tax transcripts directly from the Internal Revenue Service (IRS) using IRS Form 4506-T, which authorizes the release of your tax return information. This allows underwriters to cross-reference reported income with official tax records, enhancing accuracy.
Beyond direct employer contact and applicant-provided documents, many lenders utilize third-party verification services. Companies like The Work Number maintain extensive databases of employment and income information, often provided directly by employers. These services allow underwriters to quickly and efficiently verify employment and income details through an automated system.
Details Underwriters Seek
During the verification process, underwriters look to confirm key information about your employment. They first seek confirmation of your current employment status. This is followed by verifying your job title.
Your start date is a significant detail, indicating the length of your employment history and job stability. Underwriters also focus on your current gross income, encompassing salary, hourly wages, and any additional earnings like commissions, bonuses, or overtime. The frequency of your pay, whether weekly, bi-weekly, or monthly, is also noted.
While not always provided, underwriters may inquire about the likelihood of continued employment, though employers are often hesitant to offer such forward-looking statements. They also look for any significant recent changes in your employment or income that could impact your ability to repay the loan.
Navigating Special Employment Situations
For individuals who are self-employed, underwriters adapt their verification methods, requiring a more extensive review of financial documents. They typically request at least two years of personal and business tax returns, such as Schedule C (Form 1040) for sole proprietors or K-1s for partnership or S-corporation income. Profit and loss statements and bank statements over a specific period are also commonly used to assess consistent income.
Applicants with commission-based or irregular income sources, such as freelancers, also face specific requirements. Lenders require a longer history of income, often two years of tax returns, to calculate an average monthly income for loan qualification. This extended review helps to account for fluctuations in earnings and establish a stable income pattern.
If you have recently started a new job, lenders may request a signed offer letter detailing your new salary and start date. They may also require your first pay stub from the new employer once available, or directly contact your new employer to confirm employment and income details. For individuals who are retired or receiving disability income, underwriters verify these funds through pension statements, Social Security benefit letters, or disability income statements.