How does a lender typically verify a borrower's income?

How does a lender typically verify a borrower's income?

• A. By reviewing bank statements
• B. By checking tax returns
• C. By contacting previous landlords
• D. By running a credit check

Answer: (B)

A lender usually verifies a borrower's income primarily by checking tax returns because these documents provide a comprehensive and official record of an individual's earnings over the previous years. Tax returns show not only the income reported but also any deductions or credits that may reflect the borrower’s overall financial situation. This verification method helps ensure that the income declared by the borrower is accurate and consistent with what has been formally reported to tax authorities. In contrast, while reviewing bank statements can give insights into a borrower's cash flow, they may not provide a complete picture of income, particularly for those who have irregular income streams. Contacting previous landlords is not a reliable method for verifying income, as it primarily relates to tenancy history rather than financial status. Similarly, running a credit check assesses a borrower’s creditworthiness rather than providing direct evidence of income. These other methods serve different purposes in the lending process but do not effectively establish income levels in the same way that tax returns do.

A lender usually verifies a borrower's income primarily by checking tax returns because these documents provide a comprehensive and official record of an individual's earnings over the previous years. Tax returns show not only the income reported but also any deductions or credits that may reflect the borrower’s overall financial situation. This verification method helps ensure that the income declared by the borrower is accurate and consistent with what has been formally reported to tax authorities.

In contrast, while reviewing bank statements can give insights into a borrower's cash flow, they may not provide a complete picture of income, particularly for those who have irregular income streams. Contacting previous landlords is not a reliable method for verifying income, as it primarily relates to tenancy history rather than financial status. Similarly, running a credit check assesses a borrower’s creditworthiness rather than providing direct evidence of income. These other methods serve different purposes in the lending process but do not effectively establish income levels in the same way that tax returns do.