When you apply for a loan, lenders must verify your income source and confirm the amount of income reported matches the information on your application. This process is known as income verification.
If you’re self-employed, the process is a bit complex, as you won’t have pay stubs or W-2 forms to give your lender. Your income may also be somewhat irregular, making it more difficult for lenders to determine whether you meet their loan requirements. For example, someone who sells holiday crafts is likely to make significantly more during the fourth quarter of the year than in other quarters.
Before you apply for a loan, you need to understand the regulatory requirements and know how to prepare your documentation accordingly. Use these tips to make the verification process as seamless as possible.
What Is Income Verification and Its Function in Assessing Loans?
Lenders use income and employment verification to confirm that your income satisfies their approval requirements and complies with relevant local, state and federal regulations. Banks, credit unions and consumer finance companies use income verification in the following ways:
- Setting the interest rate on your loan
- Determining an appropriate repayment period
- Confirming you have enough income to meet your monthly financial obligations
Many banks do income verification for mortgage approval, but you should also be prepared to provide income documentation if you apply for a personal loan or an auto loan. Landlords use income verification to determine whether you can afford to pay rent every month.
How Does Income Verification Work?
The traditional verification process has a few basic components:
- You complete a loan application.
- The lender asks you to provide supporting documents.
- A loan officer contacts your employer and other entities to verify the accuracy of the information provided.
Every time a lender approves a loan, they’re taking a risk. Income verification helps minimize risk by ensuring you have enough money coming in to repay the loan in full.
Performing income verification direct-to-source also helps lenders protect themselves against fraud. Some buyers submit fake bank statements or doctored pay stubs to increase their approval odds. Using third-party sources to verify the information provided can help lenders avoid giving loans to borrowers who can’t afford to repay them.
Truv’s consumer-permissioned verification process streamlines and enhances this approach. Instead of manually gathering documents and awaiting responses from multiple entities, lenders can access income and employment details directly from verified sources such as payroll providers and banks when borrowers authenticate access. By eliminating the need for manual paper trails, Truv helps protect lenders against fraud and speeds up the loan approval process—getting you to the closing table faster.
Challenges Faced by Self-Employed Individuals
Self-employment has many benefits, such as the freedom to set your own schedule and turn down projects that don’t interest you. However, that flexibility also makes the income verification process more challenging, as your income may fluctuate significantly from one month to the next. Since they don’t receive regular paychecks, self-employed individuals also have more difficulty proving their income than salaried employees.
When you work for someone else, your employer is responsible for issuing a W-2 form every year. You also receive regular pay stubs, making it easy to document your income. Self-employed individuals don’t have access to these documents.
Top 10 Must-Knows for Self-Employed Income Verification
While income verification processes vary by lender, Truv has seen a significant increase in the adoption of instant and digital verification methods. Consumer-permissioned verification of income and employment (VOIE), like Truv’s solution, has been proven to deliver lenders income and employment information in under 30 seconds. This expedited process can help you close faster—whether you’re buying a home or refinancing to access cash from your home’s equity.
As you shop for lenders, be sure to ask about their verification process and whether consumer-permissioned verification is available. If it’s not an option, we’ve rounded up a list of helpful tips to navigate income verification as a self-employed individual:
1. Maintain Detailed Records
Keeping accurate, comprehensive records is essential. Follow these steps to ensure accuracy:
- Track all sources of income, including freelance work, contract payments and side gigs.
- Keep receipts and other forms of documentation for all business expenses.
- Use a spreadsheet program or accounting software to log transactions consistently.
2. Generate and Organize Invoices
Some lenders ask for invoices to help support your income claims. These tips will help you stay organized and on track:
- Create and send a professional-looking invoice for every contract or job completed. Include your unit price, the number of units (hours, widgets, etc.) completed, sales tax (if applicable) and the total amount due.
- Save copies of all invoices and their corresponding payments.
3. Prepare Financial Statements
Financial statements help lenders determine if your business is stable and you have a steady income:
- Prepare profit-and-loss statements, balance sheets and cash-flow statements at regular intervals. You can use Truv to connect your bank accounts and generate an asset report.
- Use these statements to summarize your income and expenses for the month, quarter or year.
4. Collect and Store Tax Documents
Before meeting with a loan officer, compile tax data and collect all tax-related documents:
- Collect all tax documents, such as 1099 forms from clients and copies of previous tax returns. Save them for reference.
- Maintain records of quarterly tax payments.
- Keep copies of any correspondence with tax authorities.
5. Keep Up with Tax Obligations
Stay informed about tax laws and deadlines:
- Regularly update yourself on tax laws that affect self-employed individuals.
- Be aware of important deadlines for tax filings and payments to avoid late-filing fees, interest and other penalties.
6. Verify and Reconcile Bank Statements
Reconcile your bank statements with your financial records:
- Review your bank statements regularly to ensure they match your recorded transactions.
- Address discrepancies immediately to maintain accurate records.
7. Seek Professional Advice
Consult with a financial advisor or an accountant:
- Work with a financial professional to make sure your approach to income verification complies with all legal and financial requirements.
- Get help with tax planning and financial management strategies.
8. Utilize Income Verification Tools
Leverage digital tools for verification:
- Use online platforms or mobile applications designed for tracking income and expenses.
- Consider using digital tools that connect to your bank accounts and invoicing system for seamless record keeping.
9. Understand Legal Requirements
Comply with all income-verification regulations:
- Familiarize yourself with local, state and federal regulations regarding income documentation.
- Ensure your approach to income verification adheres to all legal standards and guidelines.
10. Prepare for Audits and Inspections
Be ready for potential audits by tax authorities or other agencies:
- Maintain thorough and accurate records in case a tax authority decides to audit you.
- Ensure all documents are organized and easily accessible for quick review during an audit.
For more income statement examples or to learn how we can help you make income verification even easier, see Truv in action.
Frequently Asked Questions About Income Verification for Self-Employment
The answers to the following FAQs can provide more insight into income verification for self-employed individuals.
What Do I Need to Verify My Income?
To verify your income, you need several documents, including 1099 forms, tax returns, income statements, balance sheets and cash-flow statements.
What Is the Self-Employed Income Statement?
The self-employed income statement is a financial document that tracks your revenue and expenses for the year.
What Is Your Gross Income if You’re Self-Employed?
For self-employed individuals, gross income is the amount of revenue generated before deducting any business expenses.
What Is Evidence of Income?
Evidence of income is documentation that helps confirm the information you reported on your loan application. It includes tax returns, financial statements and other relevant documents.
