What Does Using Pay Stubs for Loan Applications Look Like?

When getting a loan, you have to jump through several hurdles. Loan providers need a way to be assured that you will be in a position to repay the loan.

Pay stubs are one of the solid pieces of evidence of your income and financial stability. So, at some moments, they are required. You need the knowledge, whether you’re looking at a mortgage loan, a car loan, or a personal loan.

In this article, we’ll talk about what using pay stubs for loan applications really entails. You’ll learn what lenders tend to look at and the requirements for different loan types.

What Are Pay Stubs?

A pay stub is a form of pay document that comes with the pay of an employee. On it, you'll see the details of the amount specifically earned and necessary deductions in a certain span of time. It usually displays some details to identify the said employee and their employer, as well.

Why Do Lenders Ask for Pay Stubs for Loan Applications?

Lenders need a pay stub principally for one reason. They want to know if you can afford to return the money you want to borrow from them. This is because it contains important information on the person's finances.

First, the pay stubs indicate the person's income at the current job. Then, the lender is bound to check it against the loan applied for. Second, pay stubs are usually proper documentation from a place of work. This implies that the borrower has secured employment, hence, has regular income.

Third, details outlined on the pay stub include deductions. This will display the outstanding expenses with regard to the borrower's financial obligations. A lender would need to assess this as well.

Also, pay stubs assist creditors in evaluating the debt-to-income ratio. This is commonly known as DTI. They use it to check the debt payments you make compared to the money you earn. It is advised that most lenders do not accept those with a high DTI.

It is preferable that it remains as low as 43%, or even lower. However, this still depends on the loan and the lending company. Pay stubs complete half of this equation. They explicitly indicate how much you can earn.

Key Information Lenders Look for on Pay Stubs

When using pay stubs for loans, lenders have to check for several items before they can approve the loan:

1. Gross Income

Gross income shows the total earnings that come in as your income. This will include your main earnings and any extra ones, like overtime. It's the amount before the deduction of any kind of expenses have been made. It assists the lenders in establishing how the person is capable of repaying. 

2. YTD Earnings

They may also check the information on the year-to-date (YTD) earnings that your pay stub shows. This helps them justify sustained income every month in the current year.

3. Net Pay and Deductions

Take-home pay or net income gives an idea of what is left in the employee’s hands after deductions. The lenders will need this to determine how much the person can spare. The deductions reveal the other commitments that one has. So, they can see what may hinder them from repaying a loan.

4. Employment Details

Employment info is also considered by lenders while looking at your data. That includes the employer’s name and address. Pay period dates also come into play when setting your pay frequency. So, they check if it's weekly, bi-weekly or monthly. Lenders also check your income stability.

5. Other Income Sources

Some lenders may consider overtime, bonuses, or commissions. This is also indicated on the pay stubs. Nevertheless, they generally use these amounts if they are repeated over time. So, it shows that you can earn that particular amount regularly.

How Pay Stubs Are Verified by Lenders

Lenders do not take the pay stub proof of income at face value. Instead, they check for the authenticity in various ways:

Cross-referencing

When using pay stubs for loans, it has become normal for lenders to match them with all other documents. They may have asked you to submit your bank statements during the application. They could also check your tax returns. Lenders ensure that the deposited amounts correspond to the stub’s net pay. They also need to be sure that the annual pay corresponds to the one on the tax forms.

Direct Employer Contact

Other lenders also follow up with employers to verify the details given. For one, they need to be sure that's the actual income received by the borrower. This is a check that prevents such borrowers from providing forged documents. It also helps the lenders get all the necessary information about you.

Accuracy Check

It is important for the lender to obtain genuine pay stubs. On the other hand, the details filled in have to be correct. When it comes to math, it should be accurate. After some deductions have been made on the gross pay, the resulting figure should be the net pay. All the information should be provided for both the employer and the employee. That includes the pay period.

Pay Stub Requirements for Different Types of Loans

There are some qualitative requirements based on the type of loan you want:

Mortgage Loans

Among all the loans, credit requirements are the strictest for mortgage loans. Most mortgage lenders want you to bring stubs from the last one month. You'll also need to add the W-2 Forms for that year and the previous one. Another common requirement is the Form 1040 for the same years. These comprehensive requirements are aimed at a long-term outlook. The lender gets a wider look at your source of income and earnings projection.

For self-employed applicants, the lender will require special documents. Examples are profit and loss statements and business tax returns, among others. Sometimes, you will find that lenders usually depend on the average of your income over the past two years. This is because business people usually experience changes at some point.

Auto Loans

Car loans are easier to obtain than mortgages since they come with less stringent conditions. Most auto lenders usually demand that a copy of pay stubs be attached. Usually, they want the most recent ones for pay stub proof of income. Maybe for the past one to three months, along with proof of employment.

In some cases, they want to see bank statements that show a stable paycheck. Auto lenders are more interested in the present rather than the past. They want to know you’re able to make monthly payments on a car.

Personal Loans

There are certain requirements set by lenders for granting personal loans. These may differ from one lender to another. Some of the documents that traditional banks ask for might be similar to those that mortgage lenders ask for. Modern online lenders may accept the latest pay stub. Some even use other means of confirmation.

However, some personal loan companies that work online have adopted improved measures. Many just check your income through your bank, so you do not need any pay stubs.

Bottom Line

Pay stubs for loan applications are valuable instruments. A creditor wants to determine your reliability and capacity to pay any amount borrowed. When using pay stubs for loans, collecting documents really depends on the type of loan required. Regardless, knowing what exactly the lenders are looking for in such documents goes a long way. Always keep your financial documentation properly. This will help you with loan uptake to address your needs. At the same time, maintain the principles of responsible credit.

Ensure you get your loan approval with professional pay stubs from our pay stubs tool. Easily generate clear, accurate pay stubs to prove your income and financial stability. Take the next step with confidence. Try it out today and streamline your application process.