Buying a house, renting an apartment, obtaining medical insurance, and applying for loans all have one thing in common: income verification.
Understanding how to show income verification, or proof of income, can mean the difference between getting a house or an apartment, securing government insurance, and more. But what exactly is income verification, and how is it done?
What is income verification?
Income verification is used for a number of reasons, all of which boil down to determining whether someone is eligible for a service, a loan, or a rental. All of these cases are tied to fairly major life events, making it especially important that you know how to show income verification. In day-to-day life, income verification is typically used for the following reasons:
- Mortgage companies use income verification to ensure that an applicant can afford to pay back a loan.
- Landlords or rental companies use income verification to see whether an applicant can afford to pay the rent for that location.
- Government agencies use income verification to see whether applicants qualify for government aid or health insurance and, if so, how much they qualify for. For example, someone who makes too much may not qualify for any aid, while someone who makes below the income threshold could qualify.
In all of the above scenarios, the verification serves to ensure that the applicant can afford what they’re pursuing. While the purpose is ultimately the same in all scenarios, is the process itself completed in a similar manner each time?
How do companies and agencies conduct income verification?
Income verification is a fairly streamlined process. That means knowing how to show income verification is, fortunately, fairly straightforward. Depending on the purpose of the verification, the process requires that applicants submit a few different documents to confirm their current income level. The process generally follows this formula:
- The applicant completes the form for financial aid, a loan, a mortgage, etc. On this application, they’ll include their current salary. At this point, applicants can often include proof-of-income documents, but it isn’t always necessary to get the process started.
- The receiving party — the lender, mortgage company, government agency, etc. — requests proof-of-income documents if they weren’t provided at the beginning of the process.
- The receiving party will then verify the proof-of-income documents, either by contacting an employer or contacting the IRS, if necessary. Companies can also use a third-party verification service to get the information directly.
It’s worth noting that the process may differ slightly, depending on the reason and on the company performing it. That said, it’s still generally clear-cut: apply, provide proof of income, answer any questions that may arise, and get approved or denied. If things go smoothly, the process can take a few days, or less.
If you’re denied for any reason, be sure to reach out to the other party and ask why. Once you know why, you can begin taking the necessary steps to get approved. This could include simply waiting until your financial situation improves or may involve speaking with a financial consultant to assist you with finding the appropriate paperwork.
Speaking of paperwork, it’s important to know exactly what can and can’t be used as proof of income during the verification process.
What documents can you use for income verification?
While income verification is used for multiple purposes, the documents needed to show proof of income are fairly standard across the board. It’s generally a good idea to provide two of the following documents to ensure that the process moves forward smoothly:
- **Proof-of-income letter: **This is an official document that your employer can provide. Generally, you (the applicant), not the party requesting verification, will request this document from your employer. This will often take the form of a letter on company stationery that states your dates of employment and current salary or hourly rate or a description of your compensation plan. For further clarification, look at some example verification letters here.
- Pay stub: A pay stub, ideally from a recent check, is sufficient proof of income in many cases. It’s a good idea to bring several, if possible, as this shows consistent income over a longer period.
- Pension distribution statement: Any received pension can be used for proof via a pension distribution statement. This may require the use of Form 1099-R, which you can request from the IRS.
- Unemployment benefit statement: Any unemployment benefits are technically income and can be counted as such during the verification process. You can contact your state unemployment office to request an unemployment statement.
- W2 statement: Your most recent W2 statement can be used as proof of income. You can secure this through your employer or via the IRS website.
- Bank statements: You can use a bank statement as proof of income if you’re self-employed. You can get this through your bank’s website or in person at a branch location.
The information above is only a sampling of what can be used. For a larger, more comprehensive look at what you can use for income verification, be sure to read up on income verification documents.
Common income verification challenges
Yes, the income verification process is straightforward, but there are still challenges that can arise, regardless of the reason for the verification:
- Incorrect proof of income: Because there are so many proof-of-income documents available, it’s easy to bring the wrong ones to your meeting with the other party. For example, you could bring a W-2 from the wrong year, or a pay stub that isn’t recent enough. If this happens, the other party will likely tell you what you need to change.
- You don’t meet the income threshold: There’s always the chance that you don’t meet the income threshold when applying for a loan or a rental property. If this happens, you’ll likely need a cosigner on your application, or you’ll have to improve your financial situation.
- No proof of income: If you don’t have proof of income and you’re interested in a loan or mortgage, there is still hope. You can talk with the financial or rental company and see whether it’s possible to have an asset-based agreement, get a cosigner, and so on.
- You recently changed jobs: It can be difficult to show proof of income and consistency if you recently changed jobs. If you changed jobs and are in the midst of any verification, be sure to inform the other party immediately. Be thorough, and describe why you moved jobs, what your new compensation looks like, and so on. This reduces the likelihood that this situation will create any issues with the verification process.
Most income verification challenges can be overcome with the right knowledge or, in the case of needing more income, time. If you’re ever at a loss, speak with a financial consultant to see what your options are.
How to show income verification like a pro
Income verification can feel like an extra step during your journey toward a new living space or much-needed assistance. But it serves to protect you and the other party from an arrangement in which no one benefits.
If you take your time during any application process and bring any necessary documents with you during your first meeting, everything should work out just fine.