When lenders verify and validate information included in your mortgage loan application, with all due respect, they don’t simply take your word for it. While you may enter your monthly income on the application, they will use that amount initially to preapprove you but will eventually contact your employer directly to verify what you make each month. Part of that process also asks you to provide them with copies of your most recent paycheck stubs covering a 30 day period. In this way, lenders verify your monthly income used for a final approval. But your monthly income is only part of the validation process.
The first of course is to look at the monthly gross pay for each month. If you get paid on the 1st and 15th, lenders add those amounts together for use in qualifying. Note, this is the gross or ‘before withholding’ amount. If you get paid every other week, lenders will multiply each paycheck amount by 26 (weeks) then divide by 12 (months). If you get paid once per month, there’s obviously little arithmetic needed.
Lenders will also look at your year-to-date earnings. This amount needs to match up with your current gross monthly income divided by the number of months in the year paid so far. If a lender reviews an application submitted in October the lender will use the gross amount divided by 9, or January through September. If there’s a discrepancy and the gross year-to-date amount is lower than what it should be, there needs to be a reason why.
Most often this ‘gap in employment’ is due to an extended illness or just some personal time off. In this instance, lenders will want you to literally write the reason down and forward it to them. Something like, ‘I had a baby and took some maternity leave’ or something similar. If for medical leave, you might need to also provide some verification that you were in the hospital or your doctor ordered you to stay at home until you recover.
Lenders will also look for any deductions that wouldn’t appear on your credit report. Such deductions might be for child or spousal support payments. Maybe there’s an outstanding loan in repayment from the employer. The presence of wage garnishments will also appear on a paycheck stub.
Finally, paycheck stubs are considered ‘credit documents’ in the file. All credit documents should be no more than 30 days old. This makes sense because a lot can happen going into two or three months after the submission of a loan application. Perhaps someone gets laid off or otherwise furloughed after the initial 30 day period. When the loan application gets closer to the final settlement date, it’s possibly and likely the lender will want to see an updated paycheck stub to cover the most recent 30 day period.
One final note here, when your lender asks for any type of documentation, don’t wait around and get the requested material to the lender as soon as possible. In many cases, your loan application approval process stops dead in its tracks until the information is received, reviewed and approved.