You provide your lender with all of your income documents, including your tax returns. For some reason, though, they still want to see your tax transcripts. The IRS is behind on providing transcripts, which means your loan will be delayed. Is this the case with all lenders? What is the point in getting the transcripts?
The good news is that not all lenders require transcripts – you may find a few who do not ask for them. However, in the lender’s defense, they ask for a copy of your taxes from the IRS in order to ensure that your income is what you say it is. As much as lenders would like to believe what you show on your tax returns is the real deal, it never hurts for them to make sure.
Reasons to Obtain Tax Transcripts
Every lender has their own reason to request your tax transcripts. Following are the most common reasons:
- Prove the tax returns you provided the lender are the same returns you sent to the IRS. Fraudulent cases are few and far between, but lenders need to make sure that everything matches in order to qualify you for a loan.
- Make sure you do not owe the IRS any money. If you do owe money, the lender may have to include it as a debt. This could change your debt ratio.
- Verify your business income and losses. If you hid some of the business loss you reported on your tax returns, it could lower your qualifying income.
- Make sure you filed your taxes in the first place. Some people do not actually file them, but have the paperwork to make it look like they did. Lenders must use the income you claimed with the IRS. If you didn’t claim anything then you have no income to use.
- Check for any unreimbursed employee expenses that you wrote off. The lender must deduct these expenses from your qualifying income if you report them to the IRS.
The Qualified Mortgage Rules
Most lenders require tax transcripts because of the Qualified Mortgage Rules. Lenders today have to run a tight ship when it comes to figuring out who they can lend money to. If they lend money to someone who they did not make sure could afford the loan, they could find themselves in trouble with the government. If the borrower defaults on the loan, they may have the right to come after the lender.
When a lender requests transcripts of your tax returns, they have proof of what you claimed with the IRS. They can use this to help make sure you can afford the loan. For example, if you are an employee who works on commission, but your commission does not exceed 25% of your income, you may not have had to provide your tax returns to the lender. When you sign IRS Form 4506T for the lender, though, they have access to your transcripts. If you wrote off any expenses tied to your job, it can directly impact your income. The lender has to deduct them from the gross monthly income they already calculated in order to avoid over-inflating your income and putting themselves at risk.
It is in your best interest to make sure you provide lenders with the actual documents you filed with the IRS. If you did not file your taxes, you should go ahead and do so before you apply for a loan. Today, lenders have to evaluate every aspect of a loan file, including double-checking your tax returns. Generally, your tax transcripts should not affect your ability to secure a loan approval. If you foresee any issues, be up front with your lender so that you can work out the problem together without any unpleasant surprises.