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Safeguarding Against Fraud: The Importance of Income (2023)

Lenders, landlords, and various businesses verify people’s income to reduce risks, such as the non-payment of loans. When someone defaults on the debts they owe, companies lose more than the projected revenue.

Additional expenses are involved in determining what went wrong to prevent the same situation from happening in the future. These activities include fraud investigations, which can extend to providing proof of income.

While the average person might think verifying income is meant to prevent deception, the process can present opportunities for misrepresentation. A loan applicant could supply forged pay stubs or provide a fake number for an employer.

Instead of the company’s HR department picking up the line, it’s a friend in on the scam. They pose as HR, falsely confirming the applicant’s income and employment.

Fraudulent activities like these cost everyone in the long run as lender fees rise and credit restrictions tighten. Thankfully, requiring proof of income often safeguards against fraud. However, there are ways to strengthen the process so lenders can further reduce their risks. Here’s why verifying income can be so important during financial transactions.

Identifies the Ability To Pay


When someone fills out a mortgage or rental application, they must meet income thresholds. A common benchmark is three times the monthly payment. In other words, the applicant should have a monthly income that exceeds the monthly payment by three times.

Say the mortgage payment comes out to $1,500 a month. A person’s gross monthly income must be at least $4,500.

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Benchmarks like these reassure the lender that the applicant can comfortably afford the mortgage. The same applies when someone wants to rent a property. Everyone knows there are more expenses in life than the rent or the mortgage.

Other items like utilities, gas, and childcare will be in the budget. The more the rent or mortgage payment takes out of someone’s paycheck, the higher the risk for landlords and lenders.

Verifying a person’s income lets mortgage and rental companies assess each applicant’s risk. The dollar amount someone puts down on paper isn’t enough. Anyone can come up with a figure to make themselves appear qualified.

So, companies will ask for proof, such as pay stubs, W2s, and IRS income tax forms. Automated processes that sync with employers’ payroll systems remove the potential for fraudulent forms and contacts. You can visit here for more information about how verification of income substantiates an applicant’s ability to pay.

Helps Raise Red Flags

Inconsistencies during the income verification process can help businesses pinpoint indicators of potential fraud. For instance, someone might apply for a mortgage using aged bank statements. They say they’re self-employed and earn $75,000 a year.

A closer examination of bank accounts from the past two years shows this number might be inflated.

Perhaps the person was still employed full-time while they attempted to build up their business. The $75,000 income they’re reporting is what they earned with conventional and self-employment. But now, they’re fully out on their own and not making near what they were.

Truth be told, the applicant is currently taking home the equivalent of $40,000 a year.

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A 2022 mortgage fraud report reveals about one in 131 applications during the second quarter involved possible fraud. Overall, it may not sound like a lot. Yet, specific properties, such as multifamily dwellings, have increased risk.

About one in 34 mortgage apps for duplexes, triplexes, and four-unit buildings contain fraud indicators. Income fraud risk is also one of the rising trends in the mortgage industry.

Fake or misleading documents are where most of the exposure comes from. Verifying self-employment has always been trickier for lenders. But with more people adopting the gig worker lifestyle, nailing down someone’s actual income is becoming a challenge.

And unfortunately, it’s also making it easier for applicants to falsify information. It’s partially why the IRS has introduced online income verification services for taxpayers and lenders.

red flags

Validates Sources of Information

Sometimes the information someone provides seems legit. They’ve got an employer listed on their application and a W-2 bearing the organization’s name. But what if they were just let go? The person may not disclose this detail so they can secure a loan.

The lender might do more than take the W-2 at face value. Nonetheless, a manual verification process kicks in if the organization doesn’t have an online payroll system. Maybe it’s a smaller company without technology lenders can sync with online. The person applying for a loan has a number listed, which is supposed to be for the HR rep.

To avoid getting caught, the applicant gave a fake phone number. They provided the digits to a family member, who agreed to pose as HR. The lender calls, thinking they’ve verified employment and income. Months later, the applicant stops paying on the loan, and the home forecloses.

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A few methods can prevent this, even though manual verification processes are more susceptible to fraud and errors. One is to slow down and double-check whether the numbers to companies are factual.

Cross-referencing businesses’ websites and online directories can reveal discrepancies. Another way is to partner with income verification services that help validate accuracy. It never hurts to confirm the validity of each detail, as it can stop potential fraud.

Income Verification’s Role in Fraud Prevention

Income Verification

A 2022 industry fraud report found about 70% of financial institutions lost $500,000 or more to fraudulent transactions. First-party fraud is the most prevalent type and happens when someone misleads a bank or lender. They say they earn more than they do or have access to financial assets when they don’t. Essentially, applicants say they can pay when they can’t.

Consequently, they get something for free (at least for a while). The company loses revenue and must spend money on correcting the problem. Correction may involve repossessing and liquidating an asset, such as a home.

It may also mean evictions, court dates, and other legal remedies. In the end, creditors spend additional resources on processes to fight fraud.

Income verification can be an integral part of those safeguards.

The process shows whether applicants can pay, reveals inconsistencies, and validates the accuracy of the supplied information. Digital automation and additional layers of substantiation can help companies build even stronger defenses.

With increased protection against fraud, those trusting applicants’ information won’t have to rely on instinct alone.


Miranda Cosgrove

My Miranda cosgrove is an accomplished article writer with a flair for crafting engaging and informative content. With a deep curiosity for various subjects and a dedication to thorough research, Miranda cosgrove brings a unique blend of creativity and accuracy to every piece

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