You’re hosting an open house for a charming Brooklyn brownstone. A young couple walks in, eyes sparkling with excitement. They envision themselves raising a family in this very spot.
Fast forward a few weeks – you’ve drafted a winning offer, and it’s been accepted!
But hold on! Before the celebratory high-fives, there’s a crucial hurdle to navigate: income verification for the mortgage application.
In the fast-paced world of NYC real estate, diverse income streams are the norm. Your clients might be salaried professionals, enterprising freelancers, or savvy real estate investors. Each scenario comes with its own set of income verification requirements.
This guide will equip you to confidently navigate the income verification maze with your clients, ensuring a smooth path to homeownership.
Income Verification 101: The Essentials
Let’s start with the building blocks. For most mortgage applications, lenders will require the following:
- A Government-Issued Photo ID: This verifies your client’s identity – a crucial first step!
- Social Security Number: This is used to access your client’s credit report and tax records.
- Proof of Employment: This can be a recent pay stub (typically the past 30-60 days) with the employer’s contact information.
Beyond the Basics: Tailoring Documentation to Income Type
Now, let’s delve into the nitty-gritty of income verification for different employment scenarios:
- Salaried Employees: As mentioned above, recent pay stubs are key. If your client recently changed jobs, a letter from their new employer verifying their start date and salary is helpful. For bonuses or commission-based income, documentation of past payouts might be required.
- Self-Employed and Business Owners: This requires a different approach. Your clients will need to provide the past two years’ worth of personal and business tax returns. Profit and loss statements, along with business bank statements reflecting income and expenses, are also crucial. Be sure these documents are clear, complete, and up-to-date – like a freshly-baked pie, they should be picture-perfect for the loan officer!
- Investors and Side Hustlers: Rental income from investment properties can be a significant income source. For this, your clients will need to provide copies of their lease agreements and recent bank statements reflecting rental deposits and payments. Income from side hustles, like freelance work or online businesses, often requires tax returns and documentation of income streams through platforms like Etsy or Upwork.
Unearthing the Unexpected: Verifying Other Income Sources
Sometimes, income verification goes beyond traditional employment. Be prepared to guide your clients through documenting these less-common sources:
- Social Security/Retirement Income: For retirees, Social Security award letters and recent benefit statements are essential. The same goes for documentation of pension or other retirement income.
- Child Support/Alimony: These can be a source of reliable income. Include court orders, separation agreements, and recent payment history documentation.
- Gifts: In some cases, family members might offer financial gifts to help with the down payment. For this, documented proof of the gift, such as a bank statement reflecting the transfer, is required.
Demystifying the Sensitive: Settlements, Judgments, Divorce Decrees, and Bankruptcies
While income verification focuses on a client’s financial well-being, it’s important to get a holistic picture. In some cases, lenders may also require documentation of:
- Settlements: If your client has recently received a legal settlement, such as from a personal injury lawsuit, provide copies of the settlement agreement and any documentation reflecting the payout.
- Judgments: Any outstanding judgments against your client can impact their debt-to-income ratio, which is a crucial factor in loan approval. If there are any judgments, be upfront with the loan officer and have your client provide copies of the judgment documents and any repayment plans in place.
- Divorce Decrees: For clients who have gone through a divorce, a copy of the final divorce decree might be required. This can help the lender understand potential obligations like alimony or child support payments, which can factor into the debt-to-income ratio.
- Bankruptcies: A past bankruptcy can raise a red flag for lenders. However, with enough time elapsed and a strong credit history since the bankruptcy, it may not be a dealbreaker. If your client has filed for bankruptcy in the past, advise them to be transparent with the loan officer and have them provide any relevant discharge paperwork.
Understanding the “Why”: Transparency is Key
It’s natural for clients to feel apprehensive about sharing these personal documents. Here’s why transparency is crucial:
- Accuracy of Debt-to-Income Ratio: These documents can reveal outstanding liabilities that can affect the debt-to-income ratio, a key metric used by lenders to assess a borrower’s ability to repay the mortgage.
- Avoiding Delays and Roadblocks: Withholding this information can lead to delays or even application denials later in the process. Openness from the start allows the loan officer to address any potential issues proactively.
- Building Trust with the Lender: Transparency fosters trust and confidence with the lender. This can be especially helpful in negotiating loan terms or navigating any complexities that might arise.
Remember: You’re not expected to delve into the specifics of these legal documents. However, by guiding your clients on the importance of disclosing them and facilitating their submission to the loan officer, you can ensure a smoother and more transparent mortgage application process.
Maintaining Boundaries: Why Clients Should Submit Documents Directly
While income verification delves into personal finances, it’s important to maintain clear boundaries. Here’s why it’s best for your clients to submit documentation directly to the loan officer:
- Privacy and Security: Sensitive financial information is best handled directly between borrower and lender. Loan officers are bound by strict privacy regulations.
- Accuracy and Completeness: Loan officers are trained to identify the correct documents and ensure everything is in order. This avoids any roadblocks later in the process.
- Professionalism: It streamlines the process and avoids any potential miscommunication or delays. The loan officer can request additional clarification directly from your client if needed.
Equipping Your Clients for Success: Actionable Steps
So, how can you make income verification a smooth ride for both your clients and the mortgage broker? Here are some actionable steps:
- Open Communication: Early discussions about income documentation needs set realistic expectations. Talk to your clients about the different documents they might need to gather based on their income sources.
- Gather Everything Upfront: Advise clients to start collecting documents well before the application process begins. This allows ample time to track down any missing pieces.
- Be a Resource: Provide them with a checklist of potential documents needed based on their income streams. Channel Mortgage can provide you checklists outlining income verification requirements for various types of loans.
- Stay Organized: Encourage your clients to keep electronic copies of all relevant documents in a secure and easily accessible location.
- Proactive Communication: If your client has a non-traditional income source or anticipates any challenges with documentation, advise them to discuss it with the loan officer upfront. Open communication can help navigate any potential hurdles.
As a real estate agent, you’re not expected to be a mortgage expert. However, by understanding the basics of income verification and guiding your clients through the process, you can ensure a smoother journey towards their dream home.
After all, a well-prepared client is a happy client (and a happy client leads to more successful closings)!
Bonus Tip: Consider partnering with Channel Mortgage, where we understand the diverse income streams of NYC residents. This can give your clients an extra layer of support during the mortgage application process.