When you complete your mortgage paperwork, you likely feel like you give the lender everything you have. Just when you think you are done, though, they will likely ask for IRS Form 4506-T. This form gives the lender access to your tax transcripts. If you already provided your income information, though, why does the lender need your transcripts? We explore the reasons below.
Verifying Your Income
The main reason lenders require the IRS Form 4506-T is to confirm that what you supplied them is accurate. It’s just another safeguard against fraudulent documents. The lender will compare the documents received from the IRS to the documents you provided. If the data matches, you are in good shape.
Lenders can ask for access to a variety of documents including:
- 1040 EZ
- Transcripts of your W-2s
- Transcripts of your 1099s
One area the transcripts do not help lenders is for self-employed borrowers. If your income is not positive on your transcripts, the lender will need all schedules showing your business income. This includes Schedules B, C, D, E, F, and Schedule K-1.
How Long are Tax Transcripts Valid?
The lender can request tax information going back over the last 4 years. Typically, however, they are interested in the last 2 years. This means they can validate your income, especially self-employed income, over the last few years.
You can only request one year per IRS Form 4506-T, though. So if a lender wants to validate your last two years’ of income, you’ll fill out two 4506 forms.
What is the IRS Form 4506-T?
You might wonder just what the lender sees when they request your IRS Form 4506-T? It’s not an exact copy of your tax returns. Instead, it’s a transcript, or line-item detail of your taxes. It may also include information about any payments you owe or penalties you were charged.
It gives lenders reassurance that the income data you provided is accurate.
Sticking to the Ability to Repay Rules
Following the housing crisis, lenders are required to ensure that borrowers can afford the loan they request. In an effort to make sure the income is what you say it is, the 4506-T becomes a crucial document. It was not as widely used prior to 2009, but today it is a common form that almost every borrower must complete.
What do Lenders Look For?
When lenders receive your transcript, they often look for some or all of the following:
- Does the income match the documents you provided, whether a tax return or W-2?
- Are there unreimbursed employee expenses? This could affect your qualifying income, as the lender must deduct them from your bottom line.
- Are there rental expenses written off on the taxes? If so, the lender must deduct them from your rental income.
- Are there any costs related to self-employment income?
Each of these numbers should match the information you provided the lender. If you provided all of your tax schedules, the lender will already likely know everything about your situation. If, however, you omitted certain information, you could find that your approval changes after the lender receives your tax transcripts.
The best way to make sure the IRS Form 4506-T doesn’t affect your approval is to be honest with the lender up front. Let them know about any expenses you wrote off for work, self-employment, or your rental properties. Make sure your W-2s and any other income related documents contain the same information you provided the IRS.
The lender must make sure that everything is on the ‘up and up.’ If not, they may not be able to extend a loan, as they have to believe beyond a reasonable doubt that you can afford the loan.