How does income verification differ between W2 employees and self-employed borrowers?

For W2 employees, the verification of income typically involves collecting pay stubs, which provide a clear and consistent record of their earnings directly through their employer. Since their income is reported and withholdings for taxes are managed by the employer, these pay stubs are reliable and straightforward for lenders to assess.

On the other hand, self-employed borrowers have a different situation. Their income can be more variable and is not always reflected in standardized pay stubs. Instead, they are usually required to provide tax returns, which offer a comprehensive view of their income over the past years. Additionally, self-employed individuals often need to submit profit and loss statements, which detail their business revenues and expenses, further proving their financial stability and capacity to repay a loan. This requirement is essential because it helps lenders evaluate the consistency and reliability of income for self-employed individuals, which can fluctuate more than that of W2 employees.

This distinction ensures that lenders have appropriate documentation to gauge the creditworthiness of both types of borrowers accurately.