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.
For W-2 employees, pay stubs are the easiest way to confirm these items. 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.
The key is that mortgage lenders must verify the income somehow. 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.
These non-traditional mortgages offer more flexibility for borrowers with limited income documentation. 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 ensure applicants they preapprove can truly afford 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
A down payment is the amount of money you pay upfront, decreasing how much you need to borrow in a mortgage. 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.
What lenders look for: The rule of thumb is to aim for at least a 20% down payment on a home. A down payment of this size looks less risky to lenders and gets you closer to the best loan interest rates, though 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:
- Create a budget that cuts or reduces other costs, then divert that money to a savings account (ideally a dedicated one to avoid spending it elsewhere). High-yield savings accounts pay higher interest than traditional savings accounts, helping your down payment fund grow more quickly.
- Set up recurring automatic transfers from your checking account to your down payment savings account so you cant forget to save.
- Dedicate windfallsâthink tax refunds, work bonuses and birthday moneyâto your down payment savings to reach your goal faster.
- Explore payment assistance programs, which offer financial help in the form of low-cost loans, tax credits or grants that arent repaid. Qualifications vary by state and can be strict, with eligibility often limited to first-time homebuyers or low-income borrowers.
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:
- A good credit score: Mortgage lenders often require a FICO® ScoreΠof at least 620, which is considered fair, but youll have better chances with a score of 670 or higher. Lower credit scores may be accepted for government-backed loans.
- Strong payment history: Lenders review payment history on credit cards, loans, lines of credit and anything else on your credit report. They want to see a track record of responsible, on-time payments and could ask for explanations for missed or late payments.
- Low credit utilization: Your credit utilization ratio indicates how much of your available revolving credit youre using at a given time, primarily on credit cards. Using a large amount can make you appear overleveraged and risky. Utilization rates over 30% can be a warning sign to lenders, and can also do extra damage to your credit scores, so avoid exceeding this.
- Minimal new inquiries: Lenders check if youve recently applied for other forms of credit or debt, which put hard inquiries on your report; too many in a short time could reveal possible financial trouble.
- No red flags: Lenders prefer credit reports without negative marks that show risk, such as bankruptcy, charge-offs, delinquencies, collections or accounts settled for less than the amount owed. Theyll also probably check for dispute statements or pending disputes on your credit report, since they may delay your application.
How to improve your credit:
- Get your credit mortgage-ready by making all debt payments on time; set up automatic payments so you dont forget.
- Catch up on any past-due accounts.
- Improve your credit utilization ratio by reducing credit card balances and avoiding new debt.
- Avoid applying for or opening new credit card accounts or loans in the six to 12 months leading up to your mortgage application.
- Dont close old credit card accounts that are in good standing, since the length of your credit history is a factor in your credit score.
Learn more: How to Build Credit to Buy a House
What Do Lenders Look for in Paystubs? | Mortgage Server
FAQ
Do mortgage lenders look at paystubs?
Pay stubs are typically required when buying a house with traditional or conventional mortgages. Lenders commonly verify a borrower’s income by examining pay stubs and tax returns, using these documents to assess the applicant’s ability 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?
Do you need a pay stub to get a loan?
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. 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.