6 Basic Types of Loan Verification
What do you know about different types of loan verification? Here are some important facts associated with each one and how they work.
The due diligence included as part of the loan verification process is crucial for banks to understand the customers they're working with. Improper due diligence can lead to inherent operational, legal, and even reputational risks. Without proper verification tactics, lenders are at risk for financial loss. Loan verification helps banks prepare to mitigate risks and provide customers with the proper foundation for a loan. In fact, according to one statistic, personal American loan debt reaches just over $143 billion. That's a lot of risk to mitigate.
Many loan verification types exist today, but what exactly do they entail? This article will explore 6 of the basic loan verification types. Let's dive in with one of the most common types:
Income verification plays a significant role as it relates to the financial reporting aspect of a loan application. Income provides a straightforward way for lenders to confirm customers or businesses have the means to make their monthly payments.
Some examples of scenarios in which income would need to be verified prior to loan origination:
Landlords confirming potential tenant applications
Government aid or health insurance applications
While income verification is used for a variety of reasons, the common denominator remains: is the person or business eligible for the loan in question? Income verification helps determine this.
2. Credit History
Credit history is another fundamental building block lenders look at when it comes to loan verification. This is true for both business and personal loans. A credit score helps provide an overall picture to lenders as to the applicant's credit risk. A credit score is determined by specific components such as payment history, length of credit history, and amount owed.
To that end, credit data and verification services go hand in hand as a credit report provides lenders with detailed history and habits of an individual or business. Creditworthiness is then determined and a good credit score then shows a lender the amount of risk a borrower carries going forward.
3. Available Assets
Depending on the type of loan, lenders may require a verification of asset (VOA) to secure a loan or debt. Certain types of loans that require this step may include assets such as:
Liquid assets such as cash
Lenders are looking for security when it comes to loan approval. A verification of assets helps secure this by ensuring the life of the loan in question will be taken care of in the off chance the loan doesn't get paid back.
Lenders are in the business of mitigating risk. By stipulating assets on a loan, lenders mitigate their own risk on behalf of the borrower if the borrower fails to provide payment. Assets generally need to meet, at minimum, the term of the loan in question.
4. Personal or Business Statements
Obtaining statements as part of background screenings is a good way for verification services to determine a borrower's worthiness for a loan. The documentation utilized during the loan review process can be lengthy. Some examples of documents utilized may include any of the following:
Federal income tax returns
Projected cash flow statements
Current lease documents
Evidence of any asset ownership
Some lenders or banks will even request more in-depth analysis of financial statements from years prior in order to get a complete picture of a potential borrower's financial history.
5. Title Reports
A common part of the loan verification process is the gathering of title reports. Title reports are a necessary part of the due diligence process as they help confirm whether or not the borrower has any outstanding liens or judgments filed against them.
Title reports can reveal any flaws in the chain of title and allow the borrower time to work through findings to get any issues cleared prior to moving the loan closing process forward.
To that end, title reports can also serve as a fraud review as it relates to identity theft and chain of title.
Verification of employment is a crucial step in any loan verification process. A good example of this would be during a mortgage application process. A borrower providing appropriate paperwork and documentation, even if self-employed, can make all the difference as early as the pre-approval stage.
Items that should be included on a loan application as it relates to employment include:
Company worked for
Job title or job position
Length of employment
A long-term work history is beneficial to lenders. This shows that a borrower has the ability to hold onto long-term employment. In the case of a mortgage application, long-term work history signals to lenders that a borrower will be able to make regular mortgage payments.
7. Extra Interest
There are a variety of loans that borrowers can apply for based on their financial situation. Many lenders work with third-party verification services to leverage all of the above.
Certain third-party services can assist with the details such as mortgage income verification or tax return verification online. These items are completed as part of the loan approval process on loans such as:
Consumer credit cards
Home-equity lines of credit
Small business loans
Regardless of the type of loan, it all comes down to proper documentation and preparation in order to mitigate any risk.
8. Loan Verification: Approved
From pulling title reports to assessing credit history, there are plenty of loan verification types used throughout the process of a loan. Attention to detail throughout the process may look slightly different from bank to bank. However, fundamental lending principles still apply.
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Day 1 Certainty
4506-C Income Tax Transcripts
SSA-89 Social Security Identity
VOE/I - Employment & Income
VOA - Bank Statement & Asset
Liens and Judgment Reports
Income Determination Suite (aka Income+)
Application Data Verifications
Income Determination Suite (aka Income+)
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