Among the many line items contributing to an increasingly costly mortgage process, verification of income and employment has emerged as one of the fastest-growing lender expenses. Since this verification is a critical step that lenders can’t bypass, finding more efficient and cost-effective ways to manage it is essential for protecting the bottom line — and improving the borrower experience along the way.
Verification of income and employment helps lenders assess a borrower’s ability to repay. More than just a compliance requirement, this verification enables sound underwriting decisions and reduces the incidence of errors and fraud that can lead to default and other negative consequences for borrowers, lenders and investors.
As these risks rise, so do the stakes for lenders. In fact, post-closing loan defects related to income and employment jumped 58% from first quarter to second quarter of 2024, together accounting for 37% of all critical defects and driving a 29% increase in Freddie Mac’s loan repurchase volume during the same period.
Borrower expense
To effectively manage risk while also delivering a seamless, positive borrower experience, lenders need fast and accurate verification methods that don’t add unnecessary friction for borrowers. Historical income-and-employment verification processes have often failed to meet these dual priorities.
Manual methods — collecting paystubs, contacting employers and reviewing documentation — are time-consuming and introduce opportunities for mistakes. To lighten the load, lenders began turning decades ago to verification databases that aggregate static data purchased from credit bureaus, but these databases have their own limitations.
First, the data they contain is often outdated — sometimes by weeks or months — which can result in inaccuracies and errors. For example, outdated employment records can lead to false positives, such as approving a loan for someone no longer employed, or false negatives, like rejecting a borrower who just started a new job.
Additionally, because not all employers share data with the credit bureaus, verification databases have significant coverage gaps. Government employees, small business employees, self-employed individuals and gig workers — a segment that comprises more than 57 million Americans — are especially likely to be rerouted to more cumbersome, manual verification processes.
Finally, verification databases are expensive. The Community Home Lenders of America reports that employment verification reports sourced from credit bureau data can range from $55 to $70 per pull, with a two-borrower application costing up to $280. These costs are frequently passed on to borrowers through higher fees.
Modern alternative
After decades of choosing between outdated manual processes and the shortcomings of database verifications, lenders now have modern alternatives that meet underwriting needs while improving borrower experiences and cutting costs. The first of these new school methods relies on a borrower’s direct deposit history from bank accounts to infer income and employment status.
This method provides a faster and more cost-effective alternative to traditional processes by using readily available banking information to confirm that a borrower is employed and receiving regular income. Banking data offers only indirect confirmation of employment and may not provide the detail needed in certain situations, particularly when precise data is required for compliance or risk management.
Direct payroll connections represent the newest verification of income and employment option, offering lenders real-time data by connecting directly to payroll platforms and employers’ proprietary payroll systems. Unlike databases, direct payroll connections provide highly accurate, current information sourced directly from employers with explicit permission from the loan applicant.
This approach aligns with modern borrower expectations for transparency and permissioned data sharing, helping lenders build trust. Direct payroll connections are quickly becoming the preferred solution for lenders prioritizing accuracy, speed and borrower satisfaction.
Layered approach
Lenders don’t have to choose a single method, old or new — they can integrate and layer them. Today many lenders are adopting verification waterfalls, an approach that uses multiple verification providers sequentially to increase success rates and effectively serve borrowers from varied employment situations.
One of the primary benefits of using verification waterfalls is the flexibility they offer by allowing lenders to tailor the sequence of verification methods to meet specific priorities. Lenders focused on cost efficiency can start with the least expensive options and move to higher-cost solutions only when necessary.
“With the right verification of income and employment solution, lenders can reduce loan cycle times, lower costs and improve the borrower experience — all key advantages in today’s competitive mortgage market.”
Alternatively, lenders may structure their waterfall by conversion rate, beginning with the vendor most likely to succeed and minimizing the need for subsequent attempts. Another approach prioritizes rep and warrant relief, focusing on verification providers most likely to meet government-sponsored enterprise program standards.
Whether structured to emphasize cost management, conversion or risk reduction, verification waterfalls can help lenders achieve their unique business priorities while reducing the frequency of time-consuming, resource-intensive manual verifications.
Evaluating fits
With the right verification of income and employment solution, lenders can reduce loan cycle times, lower costs and improve the borrower experience — all key advantages in today’s competitive mortgage market. But how should lenders evaluate the best fit for their needs?
Data quality, coverage and conversion are all critical considerations when evaluating a technology provider. Real-time data obtained directly from the source ensures accuracy and reduces the risk of underwriting errors that could impact loan performance or result in costly buybacks.
Robust workforce coverage closes gaps that otherwise lead to incomplete verifications, manual workarounds and, in extreme cases, application abandonment. When combined with an intuitive user experience, data quality and coverage work together to drive conversion. This will help borrowers invited to verify income and employment see the process through to the finish line.
Ease of implementation and ongoing support are additional factors lenders should consider. Adequate support during the implementation phase helps lenders get up to speed quickly, accelerating the benefits of automation. White-glove service — where the provider’s team offers hands-on support through every step of setup — smooths the transition, making it easier for lenders to leverage the solution’s full capabilities with minimal disruption.
At a time when razor-thin margins are the norm, cost remains perhaps the most critical consideration. Depending on the solution, lenders may incur charges per loan applicant or per employer and may pay for verification up front and again during the 10-day pre-closing re-verification period. The cost per loan can vary dramatically.
Finally, with data privacy regulations tightening, transparency and respect for borrower data preferences have become more important than ever. As more and more consumers exercise their right to forbid the resale of their employment data, the success rate of verification of income and employment databases that rely on purchased consumer data will continue to decline. Consumer-permissioned solutions that empower borrowers to share only what’s necessary can eliminate loan production bottlenecks while better meeting borrower expectations.
Verification of income and employment is essential for assessing borrowers’ ability to repay, ensuring compliance and mitigating risk. The question lenders face today isn’t whether to perform this verification — it’s how to do it better, faster and more affordably. As the stakes rise alongside costs, finding a modern, efficient solution is no longer optional. It’s critical to staying competitive.
