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There are more than 90% of mortgage applications every day that require manual income verification. Manual verification slows approvals and creates friction for both borrowers and lenders. So, why rely on static documents in a world where financial data updates in real time?
Open banking income verification gives lenders a speedier and more accurate means of determining income for borrowers. Lenders can securely access verified real-time financial data directly from a borrower's bank account with borrower consent.
Learn more here about open banking income verification and what it means for borrowers, especially those who are freelancers, gig workers, or self-employed.
Understanding Open Banking Income Verification
Open banking income verification uses consumer-permissioned financial data via secure APIs to determine an individual's income and financial behavior. Instead of submitting documents such as pay stubs, applicants provide temporary access to their bank account information.
Open banking income verification changes the underwriting process from a simple, static snapshot of an applicant's income to a more complete, data-driven picture of their financial health. It captures dynamic income streams that traditional documentation does not account for.
How Consented Data Access Works
Open banking processes revolve around obtaining active consent from users.. For example, if a user is looking to borrow money from a lender, the user grants the lender or a third-party vendor (TPV) permission to access certain financial data for a certain period and for a specific reason.
When permission to access the information has been granted, the lender or TPV can retrieve the necessary financial information directly from the user's bank. The process is accomplished through secure APIs, which facilitate the safe transfer of data while ensuring its authenticity.
Consent-based permission model provides additional control to users, allowing them to select what information they would like to share and when the permission to access that information will expire. A comprehensive framework fosters trust between users and financial institutions.
Reliability Trade-offs between Document Evidence and Real-Time Data
Traditional methods of verifying an individual's identity provide documentation that may be reliable, but often outdated. Open banking systems can provide access to real-time information that gives the lender an accurate representation of the borrower's current financial activity.
While using document-based evidence is reliable and easy, it is often subject to fraud and does not provide sufficient context. In contrast, real-time data is usually current, and since it is often received through a secure transaction made through an API, it is very difficult to falsify.
Consequently, many lenders use a combination of traditional and real-time evidence to achieve the appropriate degree of reliability and depth of understanding. It allows them to mitigate risks associated with fraud and make more informed choices.
Modeling Variable Income from Transaction Streams
One of the most powerful capabilities of open banking systems is the ability to evaluate the irregularity of a borrower's income. Instead of averaging income amounts for document-based loans, lenders can evaluate the transaction streams associated with a borrower to ascertain trends, stability, and risk.
Underwriting involves reviewing deposits for frequency, analyzing stability of income, and understanding the diversity of income sources. Advanced models use smoothing and rolling averages to create a reliable income profile for borrowers with non-traditional income using raw transaction data.
Alternative Underwriting for Self-Employed Borrowers
Self-employed borrowers often face added scrutiny because their income documentation doesn’t follow traditional formats. However, open banking is reshaping how lenders assess these applicants by providing a clearer view of real cash flow over time.
To better evaluate financial stability, many lenders now rely on alternative underwriting methods such as bank statement home loans, that focus on real-world banking activity rather than formal financial statements. When evaluating applications, lenders typically consider:
- The dates of the statements
- The consistency of cash flow on a monthly and annual basis
- Reserve requirements
- Adjustment for monthly expenses and risks associated with pricing based on different factors.
Through the combination of open banking data and tailored underwriting models, lenders can provide more equitable and accurate underwriting decisions for borrowers with volatile or variable incomes.
Privacy and Security Best Practices for Developers
Building a secure environment when using sensitive financial data requires solid safeguards. Developers working on open-bank integration must limit data collection to only what is necessary, encrypt all data, and manage the security of the tokens that grant third parties access to the customer account.
Additionally, they are required to track their customers' account activity and maintain transparency through audit trails. Giving them an opportunity to revoke third-party access at any time is also important.
Innovative Mortgage Underwriting Future
The use of an open banking income verification solution is changing how we obtain mortgages by allowing lenders to use real-time financial data as opposed to static documentation to validate a prospective borrower's income. As technology develops, lenders will continue to use more advanced analytical techniques to evaluate their risk and how people actually earn and spend their money.