Verification Of Employment For Mortgage To Determine Qualified Income
This Article Is About Verification Of Employment For Mortgage To Determine Qualified Income
Employment, income, and credit are the most important factors in qualifying for a mortgage. Only qualified income can be used as income by lenders. All income need to be sourced and meet agency guidelines standards. Cash income is non-existent in the mortgage business.
- Lenders want to see that the borrower has steady employment and most importantly
- In order to issue a commitment to lend, the mortgage underwriter needs to believe borrower is going to be employed for the next three years
- They need to feel confident borrower is able to afford to make his or her monthly mortgage payment
- The borrower’s ability to repay their new mortgage loan payments is the focus when the mortgage underwriter is calculating debt to income ratios
- Mortgage underwriters have a lot of underwriter discretion
- The borrower’s income needs to be secure and the probability to continue for the next three years need to be promising
Importance Of Verification Of Employment during the mortgage process.
Importance Of Verification Of Employment For Mortgage Shows Borrowers Ability To Repay
There are two ways of looking at qualifying for monthly mortgage payment:
- The lender will tell you how much you qualify for and what the maximum housing payment should be
- You as a new home buyer asking the question of how much home can I afford?
- More importantly than how much you qualify is the answer of how much house can I afford
- Mortgage underwriters do not take into account expenses that do not report on the borrower’s credit report
For example, utilities, educational expenses, entertainment, food, childcare, elderly care, and other personal expenses are not taken into consideration by mortgage underwriters when calculating debt to income ratios.
Importance Of Income And Employment
Most homebuyers depend on their incomes to pay their mortgage loan payments.
- Lenders require two years tax returns, two years W-2s, and most recent paycheck stubs
However, besides just seeing their recent paycheck stubs, mortgage underwriters will require employment verification which is also called VOE.
Types Of Verification Of Employment For Mortgage
There are two types of verification of employment during the mortgage process.
- The first is the written VOE
- The second is a verbal verification of employment
- Mortgage lenders verify the mortgage loan borrower’s income through the verification of employment
- Verification Of Employment is not just to make sure that the employee is still working but also to verify the amount they are making as well as the stability of the income
- The likelihood for the income to remain stable for the next three years is asked
- Lenders also want to know the likelihood of the borrower’s future employment to determine the Ability To Repay (Qualified Mortgage: QM)
Mortgage lenders also do a last-minute verbal verification of employment prior to issuing a clear to close as well.
Process Of Verification Of Employment For Mortgage Process
The written verification of employment is first done during the mortgage underwriting process and normally prior to the conditional approval:
- The mortgage processor will contact the human resources department of the mortgage loan applicant
- They will get the proper fax number to the contact person that will be verifying the employment of the borrower
- The written verification of employment form is a page long-form that needs to be completed by the HR manager
- The items that the HR manager completes should match the income information the mortgage loan applicant has completed on his 1003, which is the formal mortgage application
The HR manager will either fax or email the completed questionnaire back to the mortgage loan underwriter or to the mortgage processor.
Why Is Verification Of Employment So Important
Mortgage lenders need to follow federal mortgage lending guidelines with regards to debt to income ratios:
- There is the maximum debt to income ratio requirements mandated by both HUD and Fannie Mae
- Maximum front end debt to income caps allowed for FHA loans is 46.9% and maximum back end debt to income ratio caps is set at 56.9%
- For conventional loans, maximum debt to income ratios are capped at 50%
- There is no front end debt to income ratio caps on conventional loans
- Also, borrower’s employment needs to likely continue for the next three years
Final verbal verification of employment will be required prior to the mortgage underwriter issuing a clear to close.
Cases When VOE For Mortgage Applicants Will Kill Clear To Close
Prior to the mortgage loan underwriter issuing a clear to close, the underwriter or one of the underwriter’s associates will do a final verbal verification of employment.
- In most cases, it will just be a formality
- However, there are mortgage loan borrowers who quit their jobs
- They get another job after the initial verification of employment thinking that the lender will not do another verification of employment
- There are other cases where a mortgage borrower will give his or her employer notice that they will be quitting in several weeks or several months
- When the mortgage underwriter contacts the Human Resources department for final verification of employment
- One of the questions they will ask is whether the employee’s employment is likely to continue for the next three years
If borrower gave the employer notice that they will be quitting, this will backfire on the borrower and kill the clear to close and the mortgage deal.