Expert AnalysisJune 2024 Newspaper

Verification Of Income And Employment Is Essential For The Next Generation Of Homebuyers

Last year proved to be a difficult time for the mortgage industry in the U.S. as home sales plummeted to an almost 30-year low, according to the National Association of Realtors. The Federal Reserve has yet to definitively signal its intent to cut interest rates, and the timing of rate cuts — along with whether this decision will generate meaningful change in home affordability — remains to be seen.

Despite the negative impacts brought on by high inflation and mortgage rates, homeownership has not completely stagnated. Many Americans still view owning a home as a critical step towards financial stability, in addition to being a powerful investment and a significant wealth-building tool. According to a Zillow report, the share of buyers that purchased a home for the first time has increased over the past three years from 37% in 2021 to 50% in 2023.

From a risk perspective, lenders may find it daunting that half of 2023 buyers had no previous mortgage track record, making it critical for lenders to embrace an efficient, data-driven approach in their decision-making processes. This includes leveraging alternative data sets like employment and income verifications to mitigate risk and expand the number of applicants approved for loans.

Advantages of instant verification of income and employment

Today, lenders are faced with the challenge of expanding their lending portfolios and mitigating the underwriting risk associated with loan affordability. This challenge has been exacerbated by the current economic climate, which is making borrowing more expensive and financial commitments harder to achieve.

Typically, lenders verify a borrower’s income and employment for a variety of loans, including mortgages. Verification of income and employment (VOIE) assists lenders in determining a borrower’s ability to repay and helps mitigate risk. Lenders, however, must be certain that their verification method of choice provides trusted data securely and efficiently.

Compared to other verification methods, automated digital verifications allow for faster lending decisions, simplify the verification process for both borrowers and lenders, and reduce the customer friction and delays that are associated with asking borrowers to provide paystubs and W-2s. Another strength of alternative data like VOIE is that it allows lenders to quickly determine loan affordability for borrowers and may reduce quality control errors related to income calculations and employment verification.

By embedding such decisioning criteria, backed by comprehensive data, into every loan, lenders can minimize origination costs, reduce underwriting errors, and improve overall loan quality. Moreover, effective utilization of automated VOIE mitigates uncertainties associated with relying solely on paper-based procedures

Supporting the next generation of homeowners

Gen Z is an often-overlooked segment of potential borrowers, yet it represents the next generation of homebuyers. Approximately 86% of Gen Z aspire to own a home, with 45% currently saving to purchase a home in the next 5 years. Alternative data can allow lenders to expand opportunities for borrowers, say “yes” to a larger pool of these applicants, and reduce loan fallout.

Income, employment, and education verification are essential for these borrowers to establish credit, especially once they enter the workforce after college. According to Equifax data, borrowers with verified higher education degrees are 28% less likely to miss loan repayments compared to those without degrees.

For lenders to remain competitive in a shifting landscape, it is critical that they properly utilize verification of income and employment during the application process. Speed, consistency, and a frictionless origination process are key, especially for borrowers who are taking the first steps in their homeownership journey.