This article originally appeared in the May 2025 edition of MortgagePoint magazine, online now.
For decades, federal employees were seen as the ideal mortgage borrowers—individuals with steady jobs, reliable income, and low risk. But massive workforce reductions over the past several months have begun to challenge that assumption. Many former government workers are turning to contract work, freelance gigs, or a mix of part-time jobs to make ends meet, and they are not alone.
Across the country, more Americans are generating income from multiple sources. And it is creating new challenges for lenders because traditional underwriting models were not built for borrowers with varied or unpredictable income. As these borrowers become more common, how can lenders adapt their processes to keep up?
Underwriting Under Pressure
Traditionally, a full-time W-2 job gave underwriters everything they needed to calculate income and determine their ability to repay, but that’s no longer a reality. Today’s workforce is changing fast, and mortgage lenders are feeling it.
More Americans than ever are embracing gig work, freelancing, or self-employment, driven by both economic shifts as well as a desire for greater flexibility and autonomy. A 2024 report from AllWork and TeamStage estimates that gig workers now make up 36% of the total U.S. workforce, while 15% are fully self-employed. And these numbers are expected to grow.
Federal layoffs have been a recent flashpoint. According to Reuters, layoffs in the federal workforce have surged more than 41,000% in February 2025 compared to the same month last year. More than 100,000 federal employees have been laid off or have accepted buyouts, and many are now shifting to freelance work and contract roles.
For lenders, this shift presents real challenges. While verifying one source of W-2 income is straightforward, verifying income from multiple part-time jobs, 1099 contracts, or business earnings is not. Each source may have its own documentation and timeline, and many don’t feed into traditional payroll databases or employer reporting systems. To build a full financial picture, underwriters often chase down tax returns, bank statements, and letters of explanation—tasks that inevitably drive up loan costs.
Traditional underwriting models were never designed for this level of complexity. Even when a borrower has stable earnings, automated systems that flag income gaps or inconsistencies can cause delays or denials. Borrowers with multiple income streams often struggle to explain their income simply because it does not fit the old mold, which can cause lenders to risk losing qualified applicants, particularly at the point of sale.
To support a borrower base that looks very different than it did just a few years ago, lenders are required to rethink how they assess income—because traditional methods are no longer cutting it.
The Need to Evolve
The pressure to modernize income verification isn’t just an operations issue. Borrowers expect a fast, simple mortgage process, and lenders must meet those expectations without additional risk or cost. That’s a tough balance to strike.
Speed alone is a huge issue. Borrowers shopping for a mortgage are frequently comparing rates and offers, and whether a lender can verify income and issue a preapproval in hours can make or break a deal. The longer it takes to verify a borrower’s income, the greater chance they will move on to the next lender.
Meeting regulatory requirements is another problem. While the compliance landscape for lenders is shifting, lenders still need to ensure that a borrower’s income is real, stable, and accurately reported, no matter the source. Mistakes when calculating income can lead to repurchase risk, too. Showing that income assessments are based on verified data and consistent logic is hard to do when relying on manual processes, spreadsheets, and emails.
Fraud prevention is also a growing concern. Income fraud—one of the factors behind the 2008 housing crisis—is not only growing but becoming more sophisticated with forged paystubs and edited PDFs showing up in loan files. Verifying income directly from the source helps reduce that risk, yet many lenders still rely on documents provided by the borrower. Without a clear chain of custody, it becomes harder to prove that the information used to make a loan decision was accurate at the time of underwriting.
Manual processes come with real costs, too. Loan officers, processors, and underwriters can spend hours chasing documents, requesting verifications, and reviewing income data. Each step adds time and labor, while delays and errors can lead to missed closing dates and buybacks, all of which hit a lender’s bottom line.
Fortunately, lenders now have better options for verifying income than chasing down documents and manually reviewing paystubs. Tools are available to help lenders validate income directly from the source and do it in less time, with fewer steps, and with greater accuracy.
New Challenges, New Solutions
A game-changing tool many lenders are now using is the online or web enabled IRS-8821/4506-C process, which allows borrowers to grant lenders access to their tax transcripts for multiple years. The data comes straight from the IRS, which eliminates the need for borrowers to upload documents and removes the risk of altered or incomplete information. Unlike traditional transcript requests, such as the form-based 4506-C or 8821 Form, the IRS created an authentication process for the borrower to instantly release (or not release) their transcripts to the entity making the request. This keeps the borrower engaged during the application process and reduces costs to a minimum.
The same approach can be applied to credit and employment data. More borrowers are giving their lenders permission to access their financial information through trusted connections, whether it is a payroll provider, banking platform, or credit reporting agency. Once verified, this data can be pulled automatically and integrated into the lender’s system—which means processors and underwriters no longer need to chase down information themselves or second-guess what the borrower provided.
Verification cascades are helping as well. These are automated systems that attempt the fastest, most cost-effective verification methods first, then move to alternatives only if needed. If payroll data is not available, for example, the system may try a permissioned bank statement or initiate a manual outreach to an employer. The goal is to verify income or employment without creating extra work for the borrower or the lender.
New innovations like Encompass’ Automated Service Ordering (ASO) can take this a step further by triggering verifications based on certain loan conditions. This helps lenders avoid ordering services they don’t need, while ensuring that required verifications happen without delays. The borrower experience improves, and so does efficiency on the lender’s side.
Today’s innovative solutions also deliver long-term, organization-wide benefits. Servicing teams, for example, can benefit from having validated income documentation on file when a borrower requests a loan modification. Modern income verifications can reduce rework, speed up loss mitigation, and support better outcomes for both the lender and the borrower.
Going About It the Right Way
Of course, technology alone will not solve income verification challenges. It must be implemented in a way that fits into existing workflows and supports the people who use it every day. That starts with making sure new tools work inside the systems lenders already rely on, like their LOS or POS. If a verification product cannot integrate with a lender’s technology stack, it will likely cause more problems than it solves.
Another best practice is aligning the technology with existing processes. Lenders do not need to change how they do everything overnight. Many verification tools can be phased in, starting with high-risk loan types or borrowers with complex income, which allows teams to learn and adjust without disrupting production. It also gives processors and underwriters a chance to see how much time they save when data comes in already verified and formatted for easy review.
For the technology to deliver real value, staff needs clear instructions on how to use it. That includes knowing when to trigger a verification request, how to interpret the results, and what to do if a borrower declines to give permission. Good training helps teams avoid delays and ensures the lender gets the full benefit of automation.
Operationalizing verification tools the right way also means tracking performance. Lenders should look at how often verifications succeed on the first attempt, how long they take, and whether they are reducing errors or creating more work. This data can help lenders refine their approach and make better decisions about when and how to use each tool. The right tools, paired with the right processes, help teams move faster and with greater confidence.
The Time is Now
The bottom line is that the way Americans earn is shifting, and while this presents new challenges for lenders, it also creates an amazing opportunity.
Verifying income no longer has to be a slow or uncertain process. With better tools and smarter workflows, lenders can get a clear and complete picture of a borrower’s financial situation without adding friction. Access to real-time data, flexible technology, and permissioned systems makes it possible to verify income more quickly, more accurately, and with fewer manual steps.
Adapting does not have to mean overhauling everything, and there’s no single playbook for how to modernize income verifications. But there are more tools and partners than ever to help lenders figure out what works best. One thing is certain—lenders who adapt quickly will be best positioned to serve today’s borrowers—and win tomorrow’s market.
