Almost all borrowers must provide their last two years’ worth of tax returns to mortgage lenders, who must then verify that the returns are genuine and actually filed with the IRS.
For this reason, as part of their loan disclosures, each borrower must sign an IRS Form 4506-C (formerly known as a 4506-T). Lenders are not permitted to request tax transcripts directly from the IRS; instead, they must use a third-party company, such as a credit reporting agency, with the formal authorization known as 4506-C.
The tax transcripts are summaries of the tax returns that show the filer’s status (married, single, etc. ), adjusted gross income, taxable income, etc. , and the information has to exactly match the tax returns in the lender’s file.
I’m blogging about this because it’s a crucial subject for agents and borrowers to comprehend because the procedure can lead to significant delays and frustrations that aren’t under the lender’s control.
Yes, mortgage companies typically verify tax returns with the IRS as part of the loan approval process. This verification helps to ensure that the borrower’s income is accurately represented and that they can afford the mortgage payments.
How Mortgage Companies Verify Tax Returns
Mortgage companies can verify tax returns with the IRS in a few different ways:
- Income Verification Express Service (IVES): This is a secure online system that allows lenders to request tax transcripts directly from the IRS.
- Form 4506-T: This form can be used to request a tax transcript by mail or fax.
- Third-party verification services: Some mortgage companies use third-party verification services to obtain tax transcripts from the IRS.
Why Mortgage Companies Verify Tax Returns
Mortgage companies verify tax returns for a few reasons:
- To verify the borrower’s income: Tax returns provide a reliable source of income verification.
- To assess the borrower’s creditworthiness: Tax returns can provide insights into the borrower’s financial history, including their debt-to-income ratio.
- To comply with regulations: The Dodd-Frank Wall Street Reform and Consumer Protection Act requires mortgage lenders to verify the income of borrowers.
How to Prepare for Tax Return Verification
There are a few things you can do in advance of tax return verification if you’re applying for a mortgage:
- Gather your tax returns for the past two years.
- Make sure your tax returns are accurate and complete.
- Be prepared to provide your Social Security number and other identifying information to the lender.
What Happens if the IRS Cannot Verify Your Tax Returns?
If the IRS cannot verify your tax returns, your mortgage application may be delayed or denied In some cases, you may be able to provide additional documentation to support your income, such as pay stubs or bank statements.
Frequently Asked Questions
- Do all mortgage companies verify tax returns?
Yes, the majority of mortgage lenders check tax returns before approving a loan.
- How long does it take for the IRS to verify tax returns?
It typically takes the IRS 10-14 days to verify tax returns.
- What if I have not filed my taxes yet?
Before you can apply for a mortgage, you must file your taxes if you haven’t already.
- What if I have errors on my tax returns?
If you have errors on your tax returns, you will need to correct them before the IRS can verify them.
Additional Resources
The IRS Often “Rejects” Transcript Requests
Tax transcripts are almost exclusively ordered by lenders after borrowers enter into a contract or, worse, after their loan is approved.
This is a problem because the IRS frequently denies requests for transcripts, usually due to a small discrepancy between the information on the 4506-C and the tax returns (the information on the 4506-C and the corresponding information on the tax returns must match exactly). This is not because the tax returns are fraudulent.
Lenders must rush to send another request and begin the waiting game anew when the IRS rejects transcripts, which can cause a transaction to be delayed by days or even weeks (depending on how busy the IRS is). The IRS also sometimes just loses requests or completes them incorrectly – which can also delay closings.
JVM Now Requests Client-Ordered Transcripts At Pre-Approval – To Avoid Delays
Due to the high frequency of IRS rejections and/or delays in our sector, JVM now requires borrower-ordered transcripts during the pre-approval stage.
Many large investors will not accept transcripts that borrowers order; however, if borrowers can easily obtain their own transcripts online, we are confident that we will also be able to order them from a third party without any problems.
Additionally, in cases where we have client-ordered transcripts in hand and are nearing closing but are still awaiting third-party transcripts, we can frequently fund the loan anyway and obtain the third-party transcripts after close because we still require them to sell the loan.
If clients are unable to pull their transcripts, this is an immediate flag at the pre-approval level.
On top of this, seeing tax transcripts upfront can help illuminate tax payment plans that were previously undisclosed.