How do mortgage companies verify income?

When you apply for a home loan, you’ll need to show the lender that you can comfortably afford the repayments. But how exactly do banks and mortgage lenders check your income and confirm that you earn enough for a mortgage?

The answer may depend on how you make money and earn income from your job. Australians drawing regular wages or salaries for full time or permanent part time work may use different means to verify income to freelancers, contractors, sole traders, small business owners and other self-employed Australians.

Payslips 

If you earn a regular salary from an employer, verifying your income can be as simple as providing Pay As You Go (PAYG) payslips. You may need to provide several months’ worth of payslips to show that your income is consistent, and to account for any inconsistencies (e.g. from leave, public holidays etc).

Payment summaries

A payment summary or group certificate could allow a bank or mortgage lender to review your work income for a full financial year. You may receive this summary from your employer each year, or it may be uploaded to the ATO for you to access via mygov.

Bank statements

Providing digital or paper copies of your bank records may be able to show a mortgage lender how much income arrives in your bank account each month, as well as your average household expenses. If you’re applying for a home loan from your current bank, they may be able to use their own internal systems to review your income and transaction history.

Tax records

Tax returns from the ATO may be able to help verify how much taxable income you receive in a financial year.

If you run a small business, your BAS records may be able to help show your income.

Invoices and business records

If you’re a sole trader or small business owner, you may be able to prove your income from the jobs you do by providing invoices and financial records.

Income declaration/accountant’s declaration

If you work closely with an accountant or financial adviser to handle your finances, you may be able to provide a signed letter from this finance professional to verify your income.

Employment contracts/employer declaration

Some lenders will ask for a copy of your contract with your employer to not only confirm your income, but your conditions of employment (e.g. if you work full-time). A few lenders will want to verify these details by contacting your employer, and may ask for contact details to do so. If there are any unusual terms and conditions in your contract, or inconsistencies in your income that may require further explanations, a signed letter from your employer confirming the details could be useful here.

The lender may require that you be in your job for more than a minimum length of time before they’ll consider a home loan application, to help confirm that your income is consistent. If you’ve only been in your job for a short length of time, there may be other ways to help verify your income for a home loan. For example, if you can show that  you previously worked in a similar role in the same industry before starting with this employer, that may help to show that you’re likely to continue earning a consistent income.

What if I have multiple sources of income?

If you have a second job, or you work full-time but freelance on the side, you may earn a significant amount of secondary income alongside your primary income. You may also make money from investments that could be put towards a home loan.

However, some mortgage lenders don’t include all of your secondary income when assessing whether you can afford home loan repayments, as they may not consider these income sources to be as consistent or reliable as your primary source of income.

For example, a lender may look at 100% of your primary income plus between 80% and 50% of your secondary income to work out your total usable income for assessing your borrowing power, depending on the lender and the nature of your income.

What if I can’t provide all the documentation a lender wants?

Depending on your employment situation, you may not be in a position to provide all the paperwork requested by a lender to accompany a home loan application. For example, if a lender will only accept payslips from an employer as proof of income, but you work as a contractor or sole trader.

In cases like these, you may need to apply for a low documentation or low-doc home loan, sometimes also known as an alternate documentation or alt doc home loan. These loans let you use a different set of documents to verify your income, such as invoices, bank statements and tax records.

Keep in mind that less income verification can mean a lender is taking on a bigger risk by providing a low-doc home loan, which could mean paying higher interest rates and fees, or requiring a larger deposit.

A mortgage broker may be able to provide advice on home loan options that suit your financial situation, so you can apply for a loan to buy property regardless of your type of income or employment.

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