Chapter 05: What Is Proof of Income?

So far in our home buying series, we’ve gone over some of the essentials that you should know when it comes to buying your first home. In the previous chapter, we discussed what credit score is needed to buy a home, but now we’ll be discussing what proof of income is and how to show proof of income when buying a home.

Proof of income is an important number to lenders, landlords, and many other entities. Your income is a factor that can determine a number of things from your health insurance plan to the amount you receive for a personal loan. 

It’s essential to know what your income is and how this number impacts different areas of your life.

In this chapter, we’ll be answering important questions like “What is proof of income?”, “What can be used as proof of income?”, and more. 

To learn more about the basics of proof of income and how it can impact your home buying process, continue reading this chapter. You can also use the links below to navigate the post.

• What Is Proof of Income?
• What Can Be Used as Proof of Income?
• Proof of Income for Self-Employed Individuals
• Proof of Income for Apartment Dwellers
• Bottom Line: Proof of Income Is Required to Buy a Home

What Is Proof of Income?

Proof of income is a document or set of documents that someone, like a lender or landlord, requests to verify your income and determine your ability to pay.

Some may ask for some form of a proof of income letter. This letter summarizes and verifies your income and employment. This letter can be written by you, an employer, an accountant, or a social worker depending on your situation. 

It’s important to include your basic income information in this letter to give a clear picture of your earnings. This number can include your average work week hours, yearly salary or hourly wage, and how you foresee this income will be sustained in the future (for example, if you’ve had consistent raises in the past and anticipate raises in the future).

In addition to a proof of income letter, a lender or renter can ask for supporting documents as proof. They can also ask for a range of documents in lieu of a letter. In the “What Can Be Used as Proof of Income” section, we go into more detail regarding the types of documentation that may be accepted as proof of income. 

Proof of income can be income from a salaried or hourly job, or it can also be passive income, which is income that comes from interest, capital gains, and stock investments. It doesn’t matter how you get your income as long as you have a way to verify it to a lender.

If you’re planning on buying a house, you need to show proof of income to get pre-qualified or pre-approved for a loan, whether that be a conventional loan or a jumbo loan. Getting pre-approved for a loan can help you with negotiating the price of a home and getting the best interest rate possible.

Every lender will have different requirements in terms of credit scores, down payments, and debt-to-income ratios, but you will almost always have to show proof of income. 

For example, FHA loan requirements are typically more lenient than conventional loan requirements. Be sure to ask your mortgage lender what they require so you can determine if they’re a good fit for your financial situation. It’s also important to know the differences between an FHA loan vs. conventional loan so that you can figure out which type of loan best suits your needs.

What Can Be Used as Proof of Income?

Depending on the lender, different documents are considered more authoritative than others. For example, some may accept a pay stub while others may need a combination of a pay stub and a copy of last year’s federal tax return. 

We’ve listed below what documents you may need to show proof of income. This isn’t an exhaustive list, but it gives you an idea of what documents you can use, where you can get these items, and why some documents may work better than others. Most of these documents should include:

• Your full name
• Additional identifying information (like your Social Security number)
• Income amount
• Date
• Employer name (when applicable)

Common Proof of Income Documents

From Your Employer

Proof of income documents from your employer can give the most up-to-date picture of your income since it takes into account any changes in your wages from the past year.

• Pay Stubs. Some lenders may require your pay stub to have your pay period and pay frequency listed to verify your income. Provide your most recent pay stub as proof of income to give a more up-to-date representation of your income.
• Proof of Income Letter. This can act as as both a verification of income and a light letter of recommendation depending on your relationship with your employer.

Tax Documents

Copies of your most recent tax documents are sometimes considered the most reliable sources since these are legal documents. However, these documents may be a difficult to retrieve if you don’t keep copies readily available  after tax season ends.

These documents are also not as accurate as a recent pay stub since taxes are only filed once a year. Any raises or additional income received since the last tax season are not reflected here, so additional documents like pay stubs or bank statements may help paint a more precise picture.

• Last Year’s Tax Return (1040). This is a complete document that contains all of your sources of income in one place. Keep a copy of this form handy since it is useful for proving income and other things.
• Wage and Tax Statement (W-2). You’ll need to provide W-2s from all employers to give an accurate snapshot of your income. You can request this document from your employer(s) if you don’t have a copy on hand.

Unearned Income

A handful of documents that fall under this category are government issued. These are also reliable documents for lenders, but you should not solely rely on these streams of income as proof since these avenues sometimes are not always consistent. For example, unemployment benefits and workers compensation eventually end.

These documents can be helpful if you need to prove steady income for a short period of time, but keep in mind that you’ll need a more stable stream of income when these streams eventually stop.

• Social Security Proof of Income Letter. You can print this statement online with your “my Social Security account”. Read through the Social Security Administration’s guide to see how you or a loved one can access your benefit verification letter. You can also check out our guide to SSI income limits to learn more.
• Annuity Statement. An annuity is an agreement between you and an insurance company where you receive a fixed stream of money in exchange for a lump sum. You can request an annuity statement from your insurance agent.
• Pension Distribution Statement (1099-R). Check out this guide to using tax form 1099-R to learn about all of the instances where you can use this form.
• Court-Ordered Agreements. Agreements like alimony and child support fall under this category. You can request a copy of these agreements from the court.
• Unemployment Benefits. Unemployment benefits give temporary financial assistance to unemployed workers that meet certain requirements. These requirements are set by your respective state. You can contact your state’s unemployment office directly for a copy.
• Workers’ Compensation Letter. Workers’ compensation provides assistance to those injured in the workplace, including wage replacement and compensation for medical treatment. You can get a copy of this from the insurance company or the court that handled your case.

Proof of Income for Self Employed Individuals

Proving income while self-employed can take a little extra effort if you don’t keep yourself organized. Take a look at the documents below to see what you can use to prove your income when you are self-employed.

• Wage and Tax Statement for Self Employed (1099). These forms prove your wages and taxes as a self employed individual. It’s one of the most reliable proofs of income you can produce since it is a legal document.
• Profit and Loss Statement or Ledger Documentation. This summary of your costs, expenses, and revenues can demonstrate your income to a lender.
• Bank Statements. A bank statement can prove a stable flow of income if you have a history of steady deposits. It’s best to keep a seperate account for business expenses so you don’t confuse any transactions with your personal expenses.

Proof of Income for Apartment Dwellers

Renters and landlords normally ask for some form of a proof of income to verify your ability to pay. At the very least, you should use documents that prove steady income for the duration of your lease. For example, a combination of pay stubs and bank statements can possibly suffice if your landlord accepts these documents. Here are a few documents your landlord may ask you to produce as prove proof of income.

• Pay Stubs. Like we mentioned earlier, this can provide the most accurate snapshot of your wages.
• Proof of Income Letter. A letter like this is especially useful to you since it can give your landlord additional insight into your background.
• Last Year’s Tax Return (1040). This comprehensive document can give a full picture of your income from the last year. It can make it easier for your landlord since all of your income streams of income are recorded in one document.

Your landlord may not accept documents for short-term streams of income since the temporary cash flow may leave you unable to pay later down the line. Double-check with your landlord when you’re preparing your rental application to make sure you have the right documents and that you meet the income requirement.

Above all else, it’s important to keep copies of important documents so you can easily produce them when someone requests proof of income. Lenders and other entities often like to check specifically for verified income. This income is the amount reported to the IRS and found in tax documents like your 1040 form. Like we mentioned earlier, some feel more comfortable with this number since these are easily verifiable and usually come from legal documents.

Verified income is one of the three key numbers that matter for your financial health. This number, along with your credit score and debt-to-income ratio, are essential to seeing where you stand financially. It’s important to know how to calculate your debt-to-income ratio and credit score so you gain a better understanding of your financial health. 

Bottom Line: Proof of Income Is Required to Buy a Home

Before you buy a house, you may want to consider making a financial plan so you can determine if you’re on track financially for a loan. Having a financial plan can help you figure out what your goals are and how you’re going to achieve them.

For example, if you want to pay off your mortgage by a certain time, you can create a budget for your living expenses to help you find ways to cut back on some costs. You can access various financial calculators on Mint that can help with everything from budgeting to determining your cost of living, so you can figure out exactly how much you need to save to accomplish that goal.

If you’re interested in learning more about the home buying process, this series is for you. And now that we’ve covered what proof of income is and why it’s important when it comes to buying a house, you can move on to Chapter 6 in the series, where we’ll discuss what a mortgage is.

Source: IRS 1, 2 | Social Security Administration (SSA) 1, 2