B3-3.1-02, Standards for Employment Documentation
When you apply for a loan, your lender needs to check your employment income. This income check is important because it helps the lender decide if you can afford the loan. There are three ways your lender can check your income. You can provide the information yourself, your employer can provide it, or a third-party employment verification company can provide it.
If your lender uses the DU validation service to check your income, they won’t need the employment documents we’re going to discuss. The DU validation service will tell the lender what documents they need. The lender must follow all rules related to the DU validation service. To understand more about this service, check out “B3-2-02, DU Validation Service”.
Employment Documentation Provided by the Borrower
Let’s start with the documents you can provide to prove your income. Your lender will ask for your paystubs and W-2 forms.
Your paystub should be recent, no older than 30 days from when you first apply for the loan. It should show your earnings for the year so far. Plus, it should have enough information for the lender to calculate your income. If it doesn’t, you’ll need to provide more documents.
Your paystubs need to follow the rules in “B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns”.
Next, your W-2 forms. These need to cover the most recent one or two years, depending on the type of income you have. It should be clear from the W-2 forms that you are the employee.
By “most recent”, we mean the W-2 for the year before the current year. If you don’t have your most recent W-2, you can use other documents like an IRS Wage and Income (W-2) Transcript, a Request for Verification of Employment (Form 1005), or your final paystub for the year – as long as they provide enough information.
Your documents must be computer-generated or typed by your employer. Paystubs you download from the Internet are fine too. They should clearly show your employer’s name and the source of the information. They should also clearly show that you are the employee. The information should be complete and easy to read.
The original source of the information should be a third party, like your human resources department, payroll department, or supervisor.
If needed, you may also have to provide your personal federal income tax returns. These must be copies of the original returns that you filed with the IRS, including all supporting schedules. Alternatively, your lender can obtain transcripts of your federal income tax returns. For more information, see “B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C”.
The “most recent” tax return is the last one you should have filed with the IRS. Again, the information must be complete and easy to read.
Each tax return must be signed by you, unless the lender has one of the following: confirmation that you filed the tax returns electronically, a completed IRS Form 4506-C (signed by you) for the year in question, or IRS transcripts that validate the tax return.
Employment Documentation Provided by the Borrower’s Employer
Your lender can also get income information directly from your employer using the Request for Verification of Employment (Form 1005). This form should follow the rules in “B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns”.
The information on Form 1005 must be easy to read. Some fields on the form are optional, like the “Probability of continued employment”, “If overtime or bonus is applicable, is its continuance likely?”, and “Date of applicant’s next pay increase”.
You will need to sign Form 1005 to give your lender permission to get the income information directly from your employer. Alternatively, you can sign a signature authorization form, which gives the lender permission to request the information they need. For more on this, see “B1-1-02, Blanket Authorization Form”.
Employment Documentation Provided by a Third-Party Employment Verification Vendor
Your lender can also get your employment and income information from a third-party employment verification company. This is okay as long as you give permission, the date of the completed verification follows “B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns”, the vendor has quality control measures in place, and the lender understands they are responsible for the information they get this way.
If the third-party verification is missing any information, the lender must get it from you or your employer.
Finally, if your loan is submitted through the DU validation service, your lender must follow all rules related to the DU validation service. For more information, see “B3-2-02, DU Validation Service”.
References
For more details, visit Standards for Employment Documentation of the Fannie Mae Selling Guide.