Texas Real Estate Sales Agent ExamFinancingMedium
A self-employed borrower is applying for a conventional loan and has a fluctuating income. The lender is likely to request which of the following to verify their income stability and capacity to repay?
- ATwo years of federal income tax returns
- BA single pay stub from the current month
- CA letter from their largest client
- DProof of a high credit score only
Show answer & explanationAnswer & explanation
Correct answer: A. Two years of federal income tax returns
For self-employed individuals with fluctuating income, lenders typically require two years of federal income tax returns to assess income consistency, deductions, and overall financial stability, rather than relying on recent or partial income statements.
Why the other options are wrong
- B. A single pay stub is insufficient for self-employed individuals whose income varies significantly.
- C. A letter from a client is not a standard or verifiable method for proving income to a lender.
- D. While a high credit score is important, it does not verify income stability or amount for self-employed borrowers.
Self-Employed Income Verification
The process by which lenders assess the income reliability of self-employed borrowers, who often have fluctuating earnings.
- Requires more extensive documentation than W-2 employees.
- Tax returns are primary documentation.
- Lenders look for consistency and ability to repay based on net income.
Memory trick: Self-employed income needs a history, not just a snapshot.