4506t
Today, our Monday guy Sam Schneiderman, broker owner of Greater Boston Home Team discusses what every borrower should know about how lenders verify income these days
Not long ago, a signed copy of a borrower’s tax return, copies of W-2 forms, 1099 forms and maybe a letter from the borrower’s CPA would have been sufficient to prove income for most loans.
In today’s lending environment, lenders are more prudent. They are required by Fannie Mae to verify that the information on the tax returns submitted to the lender matches the information on file with the IRS. The lender does that by submitting form 4506t to the IRS to obtain a transcript of the tax returns on file with the IRS. That transcript is not a copy of the tax return; it consists of a line by line printout of the income and deductions from the tax returns filed with the IRS for the particular years in question.
For those who are current with their tax returns, that should not pose a problem.
For those that are behind in filing their tax returns, it’s important to keep in mind that it takes 6 to 10 weeks for the IRS to convert the tax return to a transcript. Therefore, a rate lock or a mortgage contingency date could easily expire before the lender will be able to obtain the information requested from the IRS. Without that information, most lenders will not close a loan these days.
Most lenders don't discuss this requirement up front with borrowers and I have never seen a pre-approval letter that was specifically conditional upon receipt of the verification of tax return information from the IRS, although most pre-approval letters do state that everything is subject to verification.
I decided to post about this situation after a discussion with my favorite lender. He told me the story of a borrower that got caught waiting over 10 weeks for the IRS to process his tax return. During that period, he wasn't able to close his loan because the lender could not get the transcripts requested. If he was buying a home, at some point he would have had to ask the lender for an extension which the seller was not under any obligation to grant.
PERSPECTIVE:
For those who are not sure if the IRS has processed their tax returns, another option may be to request that the lender obtain the transcripts from the IRS prior to issuance of their pre-approval letter.
