Background check: Verbal verification of employment and other intrusions

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You’d think supplying your pay stubs and bank statements would be enough to prove to mortgage lenders that you own and earn enough to qualify for your home loan. And that used to be true until technology made it easy for anyone to dummy up phony documents. Expect a verbal verification of employment and more.

1. Lenders may call your employer to verify that your employment is secure
2. They might double-check your bank balances
3. They may audit your credit account balances before closing

Verbal verification of employment is just one example of the potential intrusions into your life that are part of many mortgage applications.

What is a verbal verification of employment?

Before technology streamlined the mortgage application process, mortgage lenders would send Verification of Employment (VOE) forms to employers to get information about your position, income and job stability.

But then automated underwriting systems (AUS) stopped requiring this in most cases, only requiring what was called “alt doc” from most applicants — copies of their pay stubs and W-2 forms.

Today, in the wake of the Great Recession and the proliferation of poorly-underwritten loans, lenders must comply with the Ability to Repay (ATR) rule, and that means making sure you can afford your mortgage. So they may call your employer and make sure that your documentation reflects your true income and status.

How a verbal verification of employment works

Fannie Mae, Freddie Mac or government-backed loans require lenders to confirm the accuracy of the documents you provide when applying for a home loan.

Fannie Mae, for example, insists your lender calls your employer no more than 10 businesses days before closing. That call will confirm you’re still employed under broadly similar terms to those when you first applied. Your application will be disrupted if you don’t work there anymore or are making significantly less money.

Job change? You can still get approved for a mortgage

Fannie’s not messing around here. It insists lenders fully document the call. Also, it says they must independently verify the phone number, rather than rely on the one you’ve given them.

For FHA loans, the lender can obtain a written VOE from the employer, or all of the following:

• copies of the most recent pay stub with year-to-date earnings
• copies of the original W-2 forms from the previous two years
• documentation of current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified

None of this means you can’t change jobs during a mortgage application. You need to tell your lender as soon as you know and you must document your new terms of employment.

VOEs and the self-employed

The self-employed face different VOE rules. In addition to checking your income with tax returns and current financials like balance sheets and income statements, lenders need to know that your business is still, well, in business.

They must do this through a third party source:

• Verify a phone listing and address for the borrower’s business using directory assistance or the Internet (your business must be listed under a company name to use this option)
• Verify the business directly with a regulatory agency or the applicable licensing bureau by obtaining a copy of the business license, which must be active and in good standing
• Verify the company’s continued existence with your business CPA

Last-minute credit checks

VOEs aren’t the only last-minute checks. Your lender will typically pull your credit for a second time in the days running up to closing. This catches out all too many borrowers.

It’s natural to make exciting plans for your new home. Maybe you’re out shopping and spot the perfect sofa for your family room. Or perhaps you happen across a special on paint at your local store. You pull out your plastic and ... disaster.

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You think you’ve already jumped through all the necessary credit hoops. After all, you have an approved application.

Of course, you’ll make sure you carry on paying your bills on time. Applying for new credit, opening new accounts or increasing the balances on your existing lines of credit can delay your closing or derail your loan altogether.

Higher balances could increase your debt-to-income ratios and push you over that fine line between approvable and unacceptable.

You’re not safe until you close

The last-minute verbal verification of employment and credit check are now routine. However, they’re not the only dangers home buyers face ahead of closing.

If your lender’s underwriter finds anything that appears inconsistent or unusual, he or she can ask for more information or evidence. For instance, that bank statement you provided shows a few bounced checks. Or an unusually large deposit.

Of course, once approved, most applications sail through with no or few queries. Nothing’s final until everything’s finalized, which is when you become the legal owner of your new home.

Handling extra hoops

Here’s what to do when your lender asks you to clarify a point or provide additional documents:

• Stay calm and friendly — few loan officers enjoy needling their customers. It’s their job to be sure you’re a good borrower
• Be responsive and helpful — you’re the one who’ll suffer most from delays. Provide answers and evidence as quickly as possible
• Go the extra mile — volunteer to ask Uncle Henry for his investment account statements to verify his down payment gift

In other words, don’t take lenders’ requests personally. See it as your job to help them tick the boxes that their job requires. Ultimately, you both want your mortgage to go ahead.

Intrusion that helps you

Nobody’s pretending that lenders carry out checks and verifications for anybody’s benefit but their own. They are protecting their own interests.

But you are a collateral beneficiary. Because your lender’s objective is to make sure you can comfortably afford your monthly payments. And that’s something you want just as much as it does.