Lenders requiring income tax verification

Stated income loans were a big part of mortgages through the middle of the previous decade. Originally designed for self-employed borrowers who re-invested much of their capital into promoting their business or took advantage of multiple deductions the stated income soon spread into W2 employees. When you see the stories about a fast food cook buying a $300,000 home this was generally the result of overstated income.

Mortgage insiders recognize this was because the rating companies, those such as Standard & Poor’s and Moody’s, rated mortgage backed securities of pools containing this type of loan with the highest ratings. Resulting was a massive increase in the number of these loans being purchased on the secondary market and in return an increased number of them also being originated by lenders who offered the now formerly hyped “sub-prime loans”. The rest, as they say, is history.

Today when applying for a loan you may be asked for a copy of your last two years of income tax returns. Additionally you may hear the terms, “all schedules, all pages” meaning the underwriter wants to see all of your income sources and deductions.

When the borrower provides these documents as requested that is not the end of the story. Lenders, at least most lenders, are also requesting copies of tax return transcripts from the Internal Revenue Service to verify the tax returns provided by the applicants match the ones on file at the IRS. Generally form 4506T is used to request tax returns for the previous two to three years.

Refusal to sign the document giving the lender permission to request transcripts of the tax returns would generally result in the lender ceasing to continue underwriting the file.

If a borrower has not filed tax returns for the previous years leading up to the mortgage application and the file at or near the time of applying for a mortgage the underwriter may reject the application stating the filing of the tax returns appears to be solely for the purpose of being approved for the loan. Further, if the applicant is filing a late return at the time of mortgage application the transcripts may not be on file quickly enough for the IRS to deliver them to the lender.

When a borrower finds their self in this situation they should consult with their mortgage professional to get an underwriter’s opinion on whether or not they will be able to be approved with the late filing. Even then if the applicant is filing taxes late and at or near the time of the mortgage application they will need to provide, in most cases, a copy of a paid in full receipt and stamped documents directly from the IRS. Either way the applicant should check with their mortgage professional in regards to taxes and verification of income by using tax transcripts.