Verification of Employment
When applying for a mortgage loan, a lender will have to verify your employment. The lender needs to make sure you are and will remain employed to ensure all income sources are taken into consideration.
Why is verification of employment done?
Employment is verified early in the loan process to ensure that you qualify for the loan. However, employment will be re-verified before closing to make sure nothing has changed. Any change in your job can affect your ability to pay your monthly mortgage payment. It is often encouraged to avoid changing jobs or to take out new loans or lines of credit when applying for a mortgage.
During the home loan application process, lenders will calculate front-end and back-end ratios. The front-end ratio compares your gross income to your potential housing payment. The back-end ratio compares your total monthly debt (which includes your housing payment) to gross income. These both indicate whether you can afford to pay back your mortgage. Lenders will generally require a front-end ratio to be in the low 30% range. A back-end ratio should be no more than 45%. There may be some flexibility depending on the borrower’s credit profile. As it comes closer to the time of closing, lenders will verify your income to ensure that there has been no reduction. A reduction in income increases your debt-ratios.
How employment is verified
A lender will call your employer to confirm the information you provided them. The lender may also confirm this information by fax or mail. It’s possible that a lender will accept recent pay stubs or income tax returns and a business license for a borrower who is self-employed. However, most loans will require a more thorough employment check, as detailed by Fannie Mae’s, Freddie Mac’s, or the Federal Housing Administration’s guidelines.