Mortgage lenders consider factors like a strong credit report, steady income and employment, a savings buffer, an adequate down payment and the ideal loan type.
Youve found your dream home and youre ready to make whats probably the biggest purchase of your life. While a lucky few can pay for a home with cash, most people require a mortgage.
Given the sheer size of mortgage loans, lenders thoroughly review applications to determine if borrowers are likely to repay their debts or if they pose a risk of defaulting. Mortgage lenders consider various factors during the application process, including an overall positive credit history, a low amount of debt and steady income.
When applying for a mortgage loan, providing proof of income is one of the most important steps. Mortgage lenders want to ensure borrowers have sufficient earnings to make their monthly payments. For traditional W-2 employees, pay stubs are the typical form of income verification. But do all mortgage lenders require pay stubs?
How Mortgage Lenders Verify Income
Income verification is crucial to mortgage lenders for a few key reasons
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It shows the borrower has steady earnings to afford the loan. Irregular income could indicate repayment risk.
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It helps determine the maximum loan amount the borrower qualifies for Lenders calculate debt-to-income ratios based on income docs,
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It ensures the borrower didn’t falsify income details. Pay stubs confirm application info is accurate.
Pay stubs are the best way for W-2 workers to confirm these things. They show year-to-date earnings plus regular salary and hourly wages. However, not every borrower has pay stubs available.
When Pay Stubs May Not Exist
Plenty of borrowers have verifiable income but lack pay stubs, including:
- Self-employed individuals
- Business owners
- Real estate investors
- Retirees
- Freelancers
These applicants can prove income other ways. For example, self-employed borrowers can provide business tax returns, bank statements, or profit and loss statements.
Lenders must somehow prove the income, which is the most important thing. If traditional documentation like pay stubs isn’t available, alternatives work.
How Many Pay Stubs Do Lenders Require?
When pay stubs are part of a mortgage application, lenders typically request:
- Pay stubs covering the most recent 30 days
- W-2 forms from the past 2 years
So for monthly or bi-weekly pay, that equates to around 2-4 pay stubs. The goal is proving current income level. More pay periods may be required for recent jobs.
When Lenders Waive the Pay Stub Requirement
Certain types of mortgages don’t require income verification via pay stubs or tax returns. These include:
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Bank statement loans – Use bank statements to qualify applicants based on deposits.
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Asset-based loans – Qualify borrowers based on assets like savings or investments.
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DSCR loans – Qualify real estate investors based on property cash flow.
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Private money loans – Alternative loans with customizable criteria.
For people who don’t have a lot of proof of income, these non-traditional mortgages give them more options. However, they often come with higher rates and costs.
Providing Pay Stubs for Mortgage Preapprovals
Preapproval letters require income verification just like final loan approvals. Lenders want to make sure that people they preapprove can really pay the mortgage.
During preapproval, pay stubs help lenders estimate the loan amount you may qualify for. Final loan approval will require updated income documentation.
What Do Lenders Look For on Pay Stubs?
When reviewing pay stubs, lenders check:
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Regularity – Income should appear consistent without large fluctuations.
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Continuity – Applicants should stay at jobs for reasonable periods without gaps.
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Accuracy – Income must match what’s stated on the loan application.
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Deductions – Items like garnishments or child support should be accounted for.
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Bonuses/overtime – Additional earnings must be likely to continue.
Providing Explanations to Lenders
If your pay stubs have any red flags like inconsistencies or gaps, be ready to explain. For example, highlight new positions with increased earnings, document bonuses you regularly receive, or show how seasonal work affects income.
The clearer you are, the easier for lenders to approve your documentation. Don’t let small issues create obstacles.
When Lenders Require Bank Statements Instead
For applicants without pay stubs, bank statements can substitute as income documentation. Lenders may ask for 12-24 months of statements to calculate average deposits.
Bank statements allow self-employed borrowers to qualify easier. But expect to provide other docs like tax returns and profit/loss statements too.
Talk to Your Mortgage Lender About Documentation
If you don’t have typical income documents or have concerns about meeting requirements, talk to lenders beforehand. Many are flexible on income verification methods. Just explain your situation so they can find solutions.
The bottom line is that pay stubs are not universally mandatory. But all lenders do require income verification in some form. With the right lender, even unconventional borrowers can get approved.
Your Down Payment
For a mortgage, a down payment is the money you pay up front. It lowers the amount of money you need to borrow. Your down payment will depend on how much you have saved, the price of the home youre purchasing and even the type of home loan youre applying for.
When lenders look at your credit report, they want to see that you have at least a 20% down payment on a house. With this much of a down payment, lenders see you as less of a risk, and you can get closer to the best loan interest rates. However, some conventional loans have much lower down payment requirements.
If you get a conventional loan and put down less than 20%, youll likely get a higher interest rate and pay private mortgage insurance (PMI) to offset lender risk. This could be worth it if saving up 20% isnt doable.
Depending on your situation, you may be eligible for a government-backed mortgage with minimal down payment requirements. For example, a U.S. Department of Veterans Affairs (VA) loan requires nothing down, and loans through the Federal Housing Administration (FHA) permit as little as 3.5% down. With FHA loans, you usually have to pay mortgage insurance for the life of the loan.
How to save for a down payment:
- Make a budget that cuts other costs, then put that money into a savings account (ideally a separate one so you don’t spend it elsewhere). Higher interest rates are paid on high-yield savings accounts than on regular savings accounts. This will help your down payment fund grow faster.
- Set up regular transfers from your checking account to your savings account for the down payment. This way, you won’t forget to save.
- Put any extra money you get, like tax refunds, work bonuses, or birthday money, toward your down payment savings. This will help you reach your goal more quickly.
- Check out payment assistance programs. These give you money in the form of grants, tax credits, or low-cost loans that you don’t have to pay back. Conditions can be strict and vary from state to state. Usually, only first-time homebuyers or people with low incomes are eligible.
Learn more: How to Save for a House
Your Credit History
Mortgage lenders scrutinize your credit report well beyond your credit score to gain a sense of your track record with financial obligations.
What lenders look for:
- Most mortgage lenders want a FICO® Score΢ of at least 620, which is a fair score, but a score of 670 or higher will give you the best chance of getting approved. Lower credit scores may be accepted for government-backed loans.
- Strong payment history: Lenders look at your credit report to see how well you’ve paid for loans, credit cards, lines of credit, and other things. This is because they want to see a history of responsible, on-time payments. If payments are missed or late, they may ask why.
- Using little of your available credit: Your credit utilization ratio shows how much of your available revolving credit you’re using at any given time, mostly on credit cards. If you use a lot, it can make you look risky and over-leveraged. Lenders may be wary of utilization rates above 30%; it can also hurt your credit score more, so don’t go over this.
- Few new inquiries: Lenders check to see if you’ve recently applied for other types of credit or debt, which puts hard inquiries on your report. Too many in a short amount of time could show that you may be having money problems.
- Lenders want credit reports that don’t have any red flags on them that show risk, like bankruptcy, charge-offs, delinquencies, collections, or accounts settled for less than what was owed. Also, they will probably look at your credit report to see if there are any dispute statements or pending disputes. If there are any, they may delay your application.
How to improve your credit:
- Make sure you can get a mortgage by paying off all of your debts on time. To make sure you don’t forget, set up automatic payments.
- Catch up on any past-due accounts.
- Lower your credit card balances and stay away from new debt to improve your credit utilization ratio.
- Do not apply for or open any new loans or credit cards in the six to twelve months before you apply for a mortgage.
- If you have good credit on old credit cards, don’t close them. Your credit score is based on how long your credit history is.
Learn more: How to Build Credit to Buy a House
What Do Lenders Look for in Paystubs? | Mortgage Server
FAQ
Do you need a pay stub to get a loan?
At this point, many lenders will want to see proof of income and employment, like several pay stubs. Lenders may also run VOI and VOE reports. Every lender will perform income and employment verification before a loan goes through the underwriting process.
What proof of income should I provide to a mortgage lender?
The proof of income you provide to a mortgage lender will depend on your source (s) of income. Acceptable proof of income documents include the following: Paperless Verification of Income. Lenders may accept paperless VOI as a substitute for the traditional proof of income documents that comprise the rest of this list.
How do lenders verify income & employment?
Lenders perform verification of income and employment for mortgages multiple times during the loan cycle: At this stage, many lenders will require borrowers to provide proof of income and employment, like multiple pay stubs. Lenders may also run VOI and VOE reports.
Why do mortgage lenders verify employment and income?
To put it simply, mortgage lenders verify a borrower’s income and employment in order to validate: Why do lenders verify employment and income for mortgages? Lenders verify a borrower’s employment and income to determine the borrower’s ability to repay a home loan.
What documents do lenders need to verify income?
To verify income, lenders typically request the following documents from customers: Pay Stubs: Proof of regular wages. Tax Returns and W-2 Forms: A detailed record of yearly earnings. Bank Statements: Evidence of financial stability and savings.
How do banks verify income for mortgages?
Income verification is a critical part of the mortgage approval process, helping banks determine whether customers have the financial stability to repay a loan. Traditionally, this process relied on borrowers submitting documents like pay stubs and tax returns.
Do mortgage lenders look at paystubs?
Pay stubs are typically required when buying a house with traditional or conventional mortgages. Lenders often check a borrower’s income by looking at pay stubs and tax returns. They do this to see if the applicant will be able to make mortgage payments.
What looks bad on a mortgage application?
Poor credit score. Too much debt. Too many recent credit applications. Not being registered to vote at your current address.
Can you get a mortgage without pay stubs?
A no-doc mortgage, also known as a no-income verification mortgage, allows you to get a home loan without having to prove how much you make through a pay stub or W-2. A no-doc mortgage can be a good fit for people with nontraditional income sources, such as self-employed borrowers or real estate investors.
How many pay stubs are needed for a mortgage?
Most of the time, mortgage lenders need pay stubs from the last 30 days, or 60 days if you get paid every two months.