Are you trying to figure out the best way to go about proving income? Read this article to learn more about proof of income.
Last year saw the largest growth of first-time homebuyers since 2006. During 2019, first-time homebuyers accounted for a staggering 38% of the housing market.
If you’re ready to go through the house buying process, you’ll need to provide proof of income to qualify for a mortgage. Your income will determine how much of a home you can afford.
But, buying a home isn’t the only time you’ll be asked to prove your income. Keep reading to discover why you’d need proof of income and what documents will work.
Why Do You Need Proof of Income?
The most common time you’ll have to prove your income is when you are asking for a loan. While this includes a home mortgage, you could also be asked to prove income for a car loan or a small personal loan.
Proving your income is a way for the lender to feel more secure when lending you money. The lender wants to be sure that you make enough money that you can afford your monthly repayment amount. This means that if your monthly payment is $1,000, you need to make well above $1,000 to account for your other monthly expenses.
While there are ways to get small loans without proving your income, the situations aren’t ideal. Usually, you’ll need to provide collateral for the loan and will receive higher interest rates. To avoid taking out an unfavorable loan, make sure that you can prove you make enough to afford your payments.
How to Prove Your Income
Now that you know a few reasons why you may be asked to prove your income, it’s time to learn how you can actually do that. Merely saying how much you make won’t be enough, you’ll need an actual document showing your income.
Below are five of the easiest ways how to prove your income.
Pay Stubs
The easiest way to prove your income is with your pay stubs. Every time you get paid by a company, you should receive a pay stub. Even if your paychecks are directly deposited into your account, there should be a way for you to see your paystubs online.
If you are using pay stubs as your proof of income, be sure to provide more than just one pay period. Three months of paystubs is the recommended amount to show that you have a consistent income.
Tax Documents
If you’d rather provide one document instead of multiple pay stubs, your annual tax documents are excellent proof.
Each year when you file taxes, you fill out Form 1040, the individual income tax return form. This form includes your annual wages and deductions to determine your taxable income.
Since most people already keep several years’ worth of tax documents in case they are audited, this document should be easy to locate. Make a copy of your 1040 to provide proof of income so you can keep the original form in your records.
Bank Statements
Another way to prove your income is by providing your bank statements. This is a great option if you have multiple sources of income, such as two jobs or child support.
Some banks may let you create your own statements using a filter online. Then, you can provide a statement that only includes deposits into your account, so you’re not providing a document with every single transaction you make.
Letter From Your Employer
Were you recently hired at a new company or promoted with a pay raise? If so, any of the above methods wouldn’t accurately portray your new income. One of the best tips for proving income after a job change is to obtain a letter from your employer.
If your workplace has a Human Resources department, set up an appointment to meet with them. Explain why you need proof of income and how your job change has made this difficult. They should be able to write up a letter detailing your position, hire date, and current salary.
If you work for a small company without an HR department, you could always ask your boss or the owner of the company for a letter of proof.
Create Your Own Proof
The last idea on this list of tips for showing proof of income is to create your own proof. This method is great for someone who is self-employed but is specifically being asked for pay stubs as proof of income.
To create your own pay stub, use a free paystub generator online. Using this tool, you’ll be asked to provide company information, employee information, and salary information. Once you enter in the info requested, the website will produce an official-looking pay stub that you can print or save on your computer.
Creating your own proof is only okay to do if you include accurate information. Make sure that only include actual income figures and double-check your work before finalizing your document.
Need More Financial Help?
After reading this article, you now have a better understanding of how to provide proof of income when necessary. Whether your traditionally employed or self-employed, there are a variety of options available for you.
Start by searching for the easy to obtain records, such as pay stubs, tax documents, or bank statements. If none of those are able to accurately prove your income, ask for a letter from your employer or create your own income records.
Looking for more advice to help you get a handle on your financial future? Head to the Finance Courses section of this site to learn about a variety of money topics.
