Lenders want to know you can pay back your mortgage loan; they want to see documented proof. If you have applied or plan on applying for a mortgage loan, you might be required to submit your tax returns as part of the application process. Whatever you do, don’t try and amend your tax return to boost your income right before applying — this can result in an automatic rejection and possibly, a few legal issues.
Purpose of Requiring Tax Returns
According to Bankrate.com, lenders want to know you can afford your new home, and they want to make sure you are honest. They want to check your income for any irregularities or evidence of loan fraud. Your tax return also informs lenders of your actual gross income, including tips, overtime, alimony/child support payments and other forms of income. You'll typically be required to provide your entire tax return.
IRS Form 4506-T
You might be required to fill out IRS Form 4506-T with your lender. This form gives the lender permission to receive a copy of your IRS transcript — documentation showing all 1099s, W-2s and other tax documents received by the Internal Revenue Service — for verification. If your loan goes into underwriting, the underwriter will scrutinize your tax return in comparison with your IRS transcript.
Some loans, such as those provided by the Federal Housing Administration, or FHA, require you to submit your last two years’ worth of W-2s instead of your tax return. Check with your lender to determine if only a W-2 is required.
If you’re self-employed, you are required to file additional forms when you apply for a mortgage. The FHA requires you to submit the actual returns filed with the IRS and your state tax commission for the past two years. You don’t have to provide this yourself; instead, the lender requests the copies directly from the IRS using Form 4506-T. If you’re not required to submit your tax returns, you might be required to submit pay schedules and your business ledger proving your business and personal cash flow. All bank and investment accounts that you want considered in your application must be proven with an account statement that is printed within the last 30 days.
If you utilize numerous deductions, you might be surprised to find it is difficult to get a mortgage loan. This is because your gross income is lowered by your deductions — thus, lowering the amount you can borrow — if at all. In the couple of years leading up to applying for a mortgage, it might be beneficial to hold back on deductions to boost your income as high as it can go. Check with your tax professional or, if you use tax preparation software, crunch the numbers both ways to see the effects on your salary with and without the deductions. If it means getting into your dream home, it might be worth paying more taxes for a year or two.
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