Not all loan applications are verified for employment, and the ones that are rarely turn up a problem
It’s not as much a problem when you’re applying for a mortgage or car loan, but I’ve talked to many personal loan borrowers who were worried about the lender verifying employment.
They didn’t want their boss to think they were in financial trouble and needed a loan. One reader I talked to over email was so scared that he had already pawned almost everything he owned to avoid applying for a loan.
We’ll talk about how lenders verify employment and other information from your application but remember, the bank wants to give you a loan. Every new loan means new interest collected, so lenders don’t want to turn down loans.
They must verify some applications as a requirement for government programs or other regulations. However, the verification process is much less intrusive than most people think, and knowing what they ask should help clear your mind on the process.
How do Lenders Verify Loan Documents?
Lenders don’t verify every loan document they receive, but it’s not a lottery you want to play. Moreover, the percentage of loans verified differs by loan type, generally from just one-in-twenty loans for auto financing and one-in-five loans for personal loans.
- Larger loans like mortgages and amounts at the limit for personal loans are more likely to be verified.
- Loans qualifying for government programs like Fannie Mae and HUD mortgages usually require that the lender verify employment.
- Borrowers with bad credit scores, lower income, or a history of credit problems are more likely to have their loan verified.
- Borrowers reporting a higher debt-to-income ratio are more likely to need verification.
Most banks and lenders won’t report the actual number of loans they verify because it could lead to more people lying on applications. By not talking about it, the banks are hoping you assume that every application goes through verification.
Bloomberg reports that Santander Consumer verifies 9% of its loan applications, while loan data from Lending Club shows about one-in-three applications are verified.
If a lender does flag your application for verification, there are usually two methods they’ll use,
- Phone calls are used often because it’s usually the quickest. The lender will call your Human Resources department if there is one or will contact directly to your supervisor. Some companies require lenders to talk only to HR to minimize privacy problems.
- Email is also used when you provide an address for your employer or when calls don’t work. The problem is these usually take several days to get a response and will slow down your loan.
- More documents are the most often requested because they don’t include others getting involved. For example, the lender will ask for a copy of investment accounts or bank statements and might request your tax returns.
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Why Do Lenders Verify Your Employment?
You only have to look to the housing bubble to understand why lenders sometimes verify employment and income. The acceptance of no-documentation loans brought an explosion in mortgages based on nothing more than a signature.
Besides the chance of fraud on a loan application, lenders are required by the government and investors to verify at least a portion of their loans.
Banks are in the business of making loans, not keeping those loans on their books. When they make a loan, they look to sell it to an investor group for the cash to make more loans. Investors want an assurance that the bank is only loaning people who can repay the money, so the bank has to verify a percentage of loans.
Besides being unlucky and having your application pop up for verification, a few things in your documents could cause a red light and require verification.
- After having a loan denied in the last year, the bank wants to know why it was denied, and if there’s something, it’s missing.
- Suppose you have only been at your current job for less than two years. The loan officer will want to verify that you’re still at your employer and for how long.
- Prior loan defaults or a bad credit score. These will make it harder for the bank to sell your loan, so it needs extra assurance from verification.
- Anything at the limit for your loan, like amount or debt-to-income ratio. Loans that barely pass inspection are more likely to get flagged.
If you’re worried about a lender verifying your employment, give them the number to your HR department instead of your supervisor. HR isn’t supposed to tell your boss that they verified an application, so you should still be able to keep it on the down low.
What Do Lenders Ask When Verifying Your Employment and Loan
Even if your loan is flagged for verification, lenders are extremely limited in what they can ask your employer or bank.
From an employer, lenders are only allowed to ask if you are currently employed and your hire date. They aren’t allowed to ask about your income or how well you’re doing as an employee.
This restriction is why many companies only allow the HR department to talk to outside groups like banks or other agencies. They don’t want a supervisor accidentally spilling personal information about an employee that can open them up to a lawsuit.
From a bank, a lender can only ask if your account is currently in good standing. This verification means that the bank account is not overdrawn or closed. That’s it. They can’t ask how much money is in your account, what days you get paid, or anything else.
Are Employers Required to Verify Employment?
Employers aren’t required to respond to phone calls for verification, but most do. If you don’t want your supervisor talking to anyone about you, then make sure you let them know because most will see it as a favor, helping you get your loan approved.
Some employers require that employees provide a written letter to the company permitting for them to verify the information. The letter will state what information the company is allowed to release and that you won’t sue if that is all that’s given.
Can Debt Collectors Call Your Employer?
Debt collectors can call your employer, but just like lenders, they’re also limited to what they can ask.
Of course, the debt collector is more interested in putting pressure on you than verifying any information. For this reason, collectors will call your supervisor supposedly to confirm that you work there, but they’ll tell your boss why they’re calling. So now your boss knows that you might be in financial trouble.
In most states, debt collectors aren’t allowed to come to your workplace physically. If they need to deliver a court order or other papers, they’ll send a process server, but they aren’t allowed to harass you.
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Filling out a loan application shouldn’t be a scary process, and worrying about employment verification should not keep you from getting the money you need. Some lenders may verify employment and bank statements, but your chances are that they’ll only look at your credit report and score.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.