Q:

Why is verification of employment necessary to secure a loan?

A:

Quick Answer

Commercial lenders verify employment to determine whether or not an applicant is likely to be able to repay a loan. Many banks and other lenders calculate employment income for two years before deciding whether and how much money to lend to a person.

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Full Answer

Mortgage lenders are even more concerned with verifying an applicants' employment. In fact, failing to report being terminated from a job or receiving a demotion are considered fraud under federal law. Loan applicants are required by law to report any changes in pay rate or hours to a potential lender as well.

During the underwriting portion of the loan application process, lenders review pay stubs for the last month and then contact employers for official verification of employment. The lender sends the form to the employer, who then provides information regarding income and length of employment before signing and returning it.

Penalties for closing a loan or mortgage transaction without disclosing job loss or changes in wage or hours include the loan account being placed in default and foreclosure. Lenders conduct post-closing reviews to double-check for employment discrepancies in many cases. It is at this point that many banks and mortgage lenders discover someone has provided false information.

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