The first time I ever had to verify my income had nothing to do with a loan application. I was sitting in a real estate office trying to rent my first apartment in New York City. It was 2011 and I’d moved here for an incredibly low-paying job straight out of college. Thankfully, I did have a healthy credit score from years of responsible behavior with a credit card, but I’d just started a job and the pay was pitiful.
The broker I was working with to find an apartment told me I’d need to provide a pay stub to prove my income. I fished proof of my meager salary, in the form of a paystub, out of my purse and handed it over to the broker. Then I saw a look of shock and horror flash across her face. The rule of thumb in New York was that your annual income had to be 40 times the monthly cost of the apartment. The apartment cost $1,900 a month (even though my share was only $950), so I needed to be earning $76,000 to be a worthy renter. She told me she wouldn’t be able to find me an apartment unless I had someone who would act as my guarantor, who would be able to cover the rent if I failed to pay.
In this situation, verified income was being used to determine if I, as a tenant, would be able to pay my rent. But that’s not always the case.
What is Verified Income?
It’s exactly as the name implies: a lender (or landlord) is able to verify exactly how much you earn. This can be done a multitude of ways and depends on the lender. Some may request pay stubs, an offer letter, annual retirement benefits letter, court order or agreement about alimony and child support, rental property income and/or bank statements while others might use your tax return. You may even need to provide employer information so a lender can also verify you are actually employed.
Why It’s Important
Income is a critical component when it comes to lending decisions and how much you can borrow, especially in the wake of the 2008 financial crisis. Part of the root cause of the Great Recession had to do with the collapse of the housing market — which partially happened because mortgages were being approved to borrowers who were ultimately unable to make payments on the debt.
A product known by its slang name “NINJA loan”, which stood for “no income, no job, no assets,” was prevalent before the housing crisis. It allowed borrowers to be approved with little to no income verification. Borrowers just needed to have what the bank considered to be a qualifying credit score (remember: income doesn’t impact your credit score). That meant the bank never checked to see if a borrower would really be in the position to repay the debt.
The Dodd-Frank Act in 2010 helped put a stop to NINJA loans by requiring lenders to vet borrowers with more than just a credit score. You often need both proof of employment and verified income in order to get a loan today.
How It Protects You Too
It’s in the best interest of both the borrower and the lender for income verification to be part of the lending process. You don’t want to take on more debt than you could feasibly pay back or that would overburden your monthly budget and thwart your debt-to-income ratio. Granted, you still could get approved for more mortgage or another kind of loan than you probably need or even should be paying off — but verified income still has to be part of the underwriting process.
Even a credit card application will ask you how much you earn as part of deciding how large of a line of credit to extend you. Granted, that process doesn’t always result in proper income verification because your credit report, which gets pulled, doesn’t state your income and you don’t often have to provide tax returns or pay stubs to a credit card company.
How Turbo Imports the Number
With customer consent, Turbo accesses your tax return in order to get your IRS-verified income. You will not be required to provide pay stubs or bank statements in order for the app to verify your income. Turbo also imports your household income since it uses your tax return, which means if you’re married filing jointly and both earning income, you’re able to get personalized recommendations based on the full picture. You can also import info about multiple income streams such as being a W-2 employee with a side gig.
This is helpful for your overall financial health profile because it enables Turbo to help provide personalized information about loans and rates for which you may be eligible based on income, credit score, and debt-to-income ratio.