Common Income Verification Challenges

June 15, 2022 by Cassie McGee

Income verification serves to establish how much someone is earning for the purpose of verifying if they have the capacity to pay for something. Therefore, income is a factor that can determine the number of things, such as establishing whether someone is eligible for a service, a loan, or a rental. Taking this into consideration, it is important to understand how to show proof of income as well as common income verification challenges that may arise in the course of this process.

Reducing Financial Risks with Income Verification

While crucial for some life-changing events, income verification also demands a lot of time and effort. For mortgage companies, landlords, property rental companies or government agencies, the process can be time-consuming and error-prone, thus contributing to different delays that may negatively impact the lending or renting process. For applicants, verification requires tracking down documents and manually inputting information in order for them to prove they have a steady income and use this information to vouch for themselves and their credibility.

At the same time, verification helps protect both businesses and applicants. Verifying someone’s income is a reasonable business practice because it reduces the risk of lending or renting to people who are unable to pay. It is also beneficial for applicants, helping them determine if they can actually afford a loan or a place they are trying to rent.

Getting a clear understanding of applicants’ finances and their ability to meet necessary obligations reduces financial risks for both parties. While income verification may seem like a straightforward procedure that involves verifying someone’s income over a certain period of time, the process of obtaining this information is not always simple. Therefore, everyone involved should pay close attention to possible verification challenges that may arise and take proper measures to prevent them.

Income Verification Process

To avoid common income verification challenges, it may be helpful to both parties to understand what the process of verification looks like. Depending on the purpose of verification, applicants are required to submit a few different documents to confirm their current income level. The process generally involves the following steps:

  • Completing appropriate forms for financial aid, a loan or a mortgage where applicants include their current salary;
  • Receiving parties requesting proof-of-income documents in case they were not provided earlier in the process;
  • Verifying the proof-of-income documents, by contacting employers, the appropriate agencies or using a third-party verification service to get the information directly; and
  • Providing approval or denial to applicants.

States often have official forms used for employment and income verification, such as Form H1028 in Texas. However, employers will still need to establish their own process to respond to verification requests timely and efficiently. Use this detailed guide to understand the process of income verification, resolve common issues that may arise, and conduct it to benefit both you and the applicants.

Overview of Income Verification Challenges

Given that income verification is tied to important events in their life, this process usually places a heavy burden on applicants. While most of them provide accurate information, a few may be tempted to provide inaccurate information in the hopes of gaining more favorable results. Therefore, potential lenders, landlords or employers should never bypass the critical step of verification and carefully conduct this process. Otherwise, they risk financial loss through loan default, theft, fraud or non-payment of rent.

Common  verification challenges may include:

Providing Inaccurate Income Information

When applying for a new loan, line of credit, or property lease, applicants may want to make their earnings appear higher than they actually are to make it seem that they will be able to manage ongoing payments. This can have a significant impact on the lending process, making it critical for businesses to carefully review the information provided, gain insight into the income stability of applicants and determine if they can afford the loan.

Wrong Verification Documents

For receiving parties to establish if they are eligible for a service, a loan, or a rental, applicants have to submit proper income verification documents. While providing wrong verification documents can be an oversight not done on purpose, this can slow down the lending process, requiring lenders to pay additional attention when conducting verifications.

Applicants’ Financial Situation

To protect themselves from applicants who are not able to afford the loan or property, lenders need to take timely steps to determine if they meet the necessary threshold. For example, if a tenant does not have the income to afford the rent, there is little reason for a landlord to begin the screening process or other work related to an application. Applicants who understand what rentals are realistically available based on their income can focus on more appropriate properties without wasting lenders’ time.

Falsifying Verification Documents

Given that there are different resources available for creating fake proof of income, lenders should thoroughly screen every applicant to identify any of them who are less financially secure than they claim to be. In addition to this, to avoid this situation as one of the common income verification challenges, lenders can ask for multiple forms of proof of income.

Enhancing Verification Methods

There are many downfalls when it comes to traditional income verification methods. In addition to requiring different types of verification documents, providing current payslips, bank statements and tax return statements, applicants have to wait for days if not weeks before getting an answer once everything was verified.

However, one of the most important verification challenges related to traditional methods is that they do not provide a complete look at an applicant’s financial data. Bank statements show what is going in and out of that account for the last month or two, and applicants may be using more than one bank or have multiple accounts. Also, payslips and tax return statements show taxable income, not any other regular deposits. In addition to this, traditional methods of verification are not convenient in today’s world where applicants and businesses expect a seamless, frictionless and personalized digital experience.

On the other hand, automation of verification solves these challenges as applicants can connect their bank accounts and securely consent to share their data, which can be immediately collected and analyzed to provide information about different income streams. As a result, both applicants and receiving parties have an answer and further decisions can be based on the full picture of the applicants’ finances. Also, with more information, businesses can offer a more personalized service, which benefits customers as well.

Replace common income verification roadblocks and interruptions with a simple workflow that allows making informed decisions while all parties involved can experience a frictionless verification process.

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