When and How do Banks Verify Pay Stubs & Your Income
July 31, 2023
Banks are cautious when reviewing loan applications from different borrowers, which is why the question, ‘How do banks verify pay stubs?’ does not have a straightforward answer.
The most important thing for lenders is to have solid assurance of a debtor’s capacity to return the money they plan to borrow. Hence, it is essential to ensure you have a good credit score, a flawless credit history, and a stable income source.
But what if you are unemployed, self-employed, or have an unconventional source for your earnings? Keep reading to discover the answer and more!
Key Takeaways
- Banks typically check that the pay stub contains complete information about an employee’s salary, taxes, and deductions, has a neat and professional layout, and has resulting values that have decimals.
- Aside from pay stubs, banks also require bank and credit card statements, income tax returns, profit and loss statements, W-2 forms, and other valid documents to verify a debtor’s source of income.
- Pay stubs may not be required by banks across all states, particularly those that do not require employers to issue pay stubs to their workers.
How Do Banks Verify Pay Stubs?
Banks verify pay stubs primarily by requiring additional documents that support the income information declared on a debtor's or borrower's pay stubs.
Specifically, they examine and cross-reference pay stubs together with income tax returns, bank statements, and Form W-2s. Depending on the type of loan, banks and lenders may also ask debtors to provide profit and loss statements and proof of deposit.
Additional verification steps may also be conducted based on whether a debtor is employed, self-employed, or unemployed.
The process of verifying pay stubs and other related valid documents is called income verification. It allows banks to evaluate whether a borrower has a stable source of income to pay off the amount they intend to loan.
Unfortunately, fraud in the form of fake pay stubs and other records used to prove employment is rampant these days. That said, lenders are vigilant That said, lenders are vigilant about fabricated employment and salary documents so as not to get entangled in fraud.
Why Do People Make Fake Pay Stubs?
Although it’s illegal to use fake pay stubs for legal transactions and can lead to serious consequences, some people still take the risk and falsify their pay stubs. People who use fabricated paycheck records often do this to try and qualify for loans. They may be unemployed and need proof of stable employment and earnings.
Contrastingly, swindlers use falsified payslips for extortion. Even business owners issue false pay stubs, particularly when they are actively involved in illegal dealings and are also notoriously trying to dodge paying taxes.
Using fake pay stubs is not worth the risk because it leads to criminal charges with a minimum of 1 year to a maximum of 30 years of imprisonment and fines not less than $1,000. Worse, if you have been found to have violated multiple pay stub regulations, you can potentially face penalties amounting to $1,000,000.
How to Recognize Fake Pay Stubs
How do banks verify pay stubs? Here are some key indicators that set the real pay stubs apart from the fake ones:
Rounded Values
Real check stubs do not have rounded values. When you factor in the deductions and tax withholdings applied to the gross earnings, there is a high chance that the final result will include decimal points.
Examine your pay stub and check whether there are rounded values or missing decimals. If so, you need to ensure that your values and calculations are correct.
Disorganized Appearance
Does the text appear inconsistent? Are the lines and values misaligned? A fake pay stub usually has a haphazardly arranged layout.
Never skimp on neatness and presentation, especially on a pay stub that you can use as proof of income. If your pay stub looks messy, your application will likely get rejected at first glance.
Zeros and the Letter ‘O’ are Mixed Up
Professionally issued pay stubs strictly differentiate between the zeros and the letter ‘o.’ On the other hand, fake pay stubs often showcase how the minute details are blatantly disregarded and errors as simple as mixing ‘O’ with ‘0’ characters up can often be seen.
Missing Salary Information
If you want to make your own pay stub, use your previous pay stubs as references, and take the time to research and understand the meaning of each abbreviation.
Pay stubs must contain complete and correct information about an employee’s salary. The lack of details about taxes, salary adjustments, retirement plan contributions, and so on makes the resulting values for an employee’s net earnings questionable.
How Do Banks Verify Pay Stubs For Car Loans?
There are different factors involved when it comes to how banks verify pay stubs.
Banks consider the following:
- Price of the car
- Debtor’s credit score
- Debt-to-income ratio
- Down payment
- Income source
Verifying pay stubs also depends on whether the debtor is unemployed, self-employed, or employed as a full-time W-2 employee.
Income verification enables lenders to assess the financial capacity of a debtor to repay at least the minimum amount required for the auto loan.
Here are the different documents required based on the debtor’s employment status:
Employed Borrower
Employed borrowers or W-2 employees must present their pay stubs for the past 3–4 months. Lenders find it easiest to verify the income and pay stubs of employed debtors because the latter can submit the required documents faster.
Also, there is a higher chance that the pay stubs submitted by W-2 employees are 100% authentic.
Alternatively, banks may skip asking for pay stub copies and instead contact the employer directly to verify the borrower’s employment status and income.
Unemployed Borrower
One of the most frequently asked questions is, ‘How do banks verify pay stubs if a debtor is unemployed?’
For unemployed borrowers, they must submit documents that prove their identity. Lenders want to first prove that the debtor is not a scammer or someone with a fake identity.
Examples of valid documents that certify a borrower’s identity include a valid government ID, a Social Security Number, and proof of address.
Banks will also look into the borrower’s employment history.
Ideally, the borrower must have a clean and consistent track record in their employment history. They must not have had any involvement with major violations—especially anything involving money—at the previous companies they’ve worked for.
Self-Employed Borrower
Self-employed debtors must prepare all of their tax returns, declaring all of the expenses for their venture.
It is also ideal for self-employed borrowers to try and get pre-approval from at least two to three lenders. Pre-approvals for auto loans come with a set of conditions covering the amount that the debtor can borrow, interest rates, and payment terms.
How Do Banks Verify Pay Stubs For Personal Loans?
When banks verify pay stubs for personal loans, the requirements are often similar to those for auto loan applications. This means employed individuals must prepare their most recent pay stubs, monthly bank statements, W-2 Forms, and signed proof of employment from their employers.
Self-employed borrowers can use their most recent tax return records and collateral, while unemployed debtors should focus on ensuring they have a good credit history and credit score and secure valid proof of identity and address.
In addition, banks will also check the borrower’s credit history and charge an origination fee.
Origination fees are payments ranging between 1% and 8% of the total amount of money that the debtor wants to loan. It is meant to help cover the costs incurred in evaluating and processing credit checks and loan applications.
How Do Banks Verify Pay Stubs For Mortgage Loans?
Another common query tied to income verification and loans revolves around the question, ‘How do banks verify pay stubs for mortgage loans?’
Mortgage loans are used to procure residential properties and real estate or cover home repairs and renovations.
Below are the different documents used by lenders to affirm a debtor’s mortgage application:
Employed Borrower
Pay stubs and other proof of income, such as bank statements, enable banks to certify that employed borrowers have 100% ownership of their property or earnings. Banks also check income tax returns (specifically from the last two years).
It is also possible for lenders to dig deeper into a debtor’s nature of employment and assess whether they are currently working under a long-term arrangement.
A background check on the borrower’s employment history takes place if they have been working for less than two years at their current company.
Unemployed Borrower
Finding a co-signer with an impressive credit score is also highly recommended for unemployed borrowers who seek to secure approval for their mortgage.
If the borrower has saved money to pay for the required down payment, lenders need proof that the money acquired and accumulated to secure payment for the desired property is deposited in a bank account.
Self-Employed Borrower
Income tax returns, as well as profit and loss statements, are documents typically required from self-employed mortgage borrowers. Those who want to place a downpayment should ensure that their initial payment shows a good loan-to-value balance.
For instance, if the downpayment was acquired through the sale of property or assets, then the debtor must submit a bill of sale to prove ownership of the income or the source of funds for the down payment.
Other Ways of Proving Income
You might be wondering, “How do banks verify pay stubs if the debtor is unable to present a paycheck or wage statement?” Well, to answer that question, there are, in fact, other methods to verify a debtor’s capacity to repay the loan, such as:
Alternative Documents for Proving Income
Type | Purpose |
Annual tax declaration | An alternative proof of income that business owners can use to attest their capacity to repay a loan or lease. |
Bank account statements | Certifies whether an employee or debtor receives stable income through regular deposits in their account. |
Business expenses and transactions | Includes documentation of partnerships, acquisitions, and audited financial statements. |
Collaterals | Accepted collaterals include pledged valuable assets such as real estate property, investment accounts, and highly valuable relics and collectibles. |
Court-ordered payments | Debtors obligated by the court to pay child support and alimony may send a request to the court to issue proof of income. |
Credit card statements | Attests debtor's reliable income source to afford credit cards and other types of loans. |
Employer letter | Prepared by a company or employer to affirm an employee's or debtor’s employment and earnings. |
Franchising documentation | A self-employed debtor or business owner who can successfully purchase a franchise has the financial capacity to repay auto loans and even mortgages. |
Retirement account withdrawals | Receipts that prove retirees have retirement accounts with accumulated contributions, such as 401(k). |
Social Security statement | Provides estimated earned credits to qualify for disability and retirement benefits. |
Unemployment Benefits | A type of financial support given by the government to eligible and unemployed beneficiaries. |
W-2 form (Wage and Tax Statement) | Declares an employee’s accumulated wages and withheld taxes within a year before the deadline for tax returns. |
Are Employers Legally Obligated to Provide Pay Stubs?
Apart from discovering how banks verify pay stubs, it is also essential to check out whether pay stubs are a legal requirement in a specific location or state to begin with.
Providing proof of income, specifically in the form of pay stubs, is a legal requirement. However, it may not be true for all states, given that there is no federal law mandating companies issue pay stubs.
As such, state rules and requirements for pay stubs vary. In states such as Arkansas, Florida, Louisiana, Ohio, and South Dakota, where employers are not required to provide pay stubs, lenders usually require other proofs of income from debtors.
Meanwhile, debtors may have to submit pay stubs if they are located in any of the 26 access states that require employers to issue pay records, whether in electronic or print format.
Final Thoughts
All in all, when it comes to exploring how banks verify pay stubs, the main thing to focus on is the values declared in the document as well as the overall layout.
Also, banks scrutinize other valid documents that could help affirm a debtor’s income. These documents include income tax returns, profit and loss statements, retirement account withdrawals, and worker’s compensation benefits.
Without verified pay stubs and authentic proof of income, banks and lenders have a hard time evaluating a borrower’s ability to repay their desired loan.
Pay Stub Verification FAQ
#1. How are fake pay stubs detected?
Some of the ways banks verify pay stubs and pinpoint which ones are fabricated are by looking for rounded values, a sloppy appearance, missing values and employee information, and the repetitive error of using the letter ‘o’ in place of a zero, and vice versa.
#2. How do banks verify income for an auto loan?
Banks will look at a debtor’s most recent pay stubs, W-2 forms, bank statements, income tax returns, and proof of identity and address (for unemployed borrowers).
#3. Can I get a loan without proof of income?
Banks require proof of income to gauge whether you meet the income and credit requirements for your loan application. If you cannot provide proof that you have a stable income, you may not be granted a loan.
On the other hand, if you have a stellar credit score or if you can provide any other valid documents that can help verify your earnings, then lenders may consider your application.
#4. What information do banks look for on a pay stub?
To understand how banks verify pay stubs and distinguish real from fake ones, it is important to note that banks will scrutinize the borrower’s name, the name of their employer, salary, tax withholdings, and other deductions on their income.
#5. Can I make my own pay stub online?
Definitely! The best way to create your own pay stub online is to use a pay stub generator. Pay stub generators are super easy to use and come with a selection of templates and a built-in calculator to help you generate your pay stub in a few minutes.
