Lenders require that you have your financial house in order before they agree to lend you money for a home. When refinancing or purchasing, you need to show the lender that you have the means to support a new housing payment. Lenders usually analyze your tax returns to confirm your taxable income. Discrepancies on your tax returns can have an adverse affect on your mortgage loan approval.
Mortgage underwriters review your most recent paystubs and W-2 form. The lender may ask for the past two years' W-2s to calculate a yearly average of your earnings. Additionally, almost everyone must supply their tax returns for the past two years, including all pages and schedules, according to Bankrate.com. Lenders expect the gross income indicated on your loan application and backed up by the W-2s to match the gross income indicated on your tax returns. Discrepancies or undisclosed information on your return raises red flags for lenders.
Full Documentation Requirements
Most programs offered by mortgage lenders are "full documentation" loans. These loans allow lenders to collect financial documents for their files to justify an approval. Many lenders sell their loans on the secondary mortgage market after they close. They may be stuck with a loan and unable to sell it, however, if their file doesn't contain sufficient W-2s, tax returns and a tax transcript, or 4506-T form. Self-employed borrowers must also provide tax returns, including profit-and-loss statements.
A minor niche of mortgage lenders and loan programs do not require tax returns. Initially intended for self-employed borrowers who had difficulty documenting their income yet earned enough money for the monthly payment, stated-income loans linger in a subset of mortgage financing known as hard money and subprime loans. These lenders allow you to state income rather than document it, but in exchange give you a higher interest rate. They also usually require high down payments of at least 30 percent or 35 percent.
Additionally, streamline refinances, which conventional and government-backed loans may offer, may be completed with minimal loan qualifying and no tax returns. These loans must lower or otherwise improve the borrowers payment terms and therefore may require less scrutiny.
Lenders require tax returns as a fraud-prevention measure and to protect their financial interests in your home. Tax liens placed on your home's title take priority and must be repaid before the mortgage lender can receive any funds from the sale of your home. Lenders substantiate the authenticity of your tax returns by ordering the 4506-T transcript directly from the IRS. Unreimbursed employee business expenses that show up on your returns but not on your paystubs raise lender concerns, as do reported income that doesn't match up with W-2s.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.