Shopping for a home mortgage loan? Prepare to hand over real proof of your taxable income.
During the housing boom, lenders rarely required borrowers to provide copies of federal tax returns.
But today, lenders often ask borrowers to turn over entire tax returns, according to Brad Blackwell, national sales manager for Wells Fargo Home Mortgage.
"Often, people will think they can bring in the first two pages of the tax return, and what they need to bring is the full tax return and all schedules because a person's full income picture is contained in the entire set of documents, not just the first two pages," he says.
Borrowers generally also will be required to sign a Form 4506-T, which allows the lender to retrieve a tax transcript from the Internal Revenue Service.
Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn., says lenders use the 4506-T tax transcript to compare the borrower's W-2s to his or her reported income. If the numbers match, all is well. If not, the lender will dig deeper.
Why the sudden interest in borrowers' tax returns? The short answer is lenders are looking for income irregularities and evidence of loan fraud.
In most cases, "all aspects of the tax return (will be) examined to determine what the borrower's income is," Blackwell says.
That means the lender not only will look at reported income, but also at other items such as:
Unreimbursed employee business expenses. These so-called "2106 business expenses" typically are subtracted from income, according to Julie Miller, a sales manager at Prospect Mortgage in Irvine, Calif.
Examples include uniforms, union dues, mileage, expenses related to a cell phone used for business, marketing costs and training costs.
"If somebody makes $70,000 to $80,000 a year, but writes off $20,000 in business expenses, that is allowing them to reduce their taxable income, but we have to subtract that for qualifying purposes," she says.
Rental property income. This income must be documented and shown on the tax return, unless the property was purchased in the current calendar year. In that case, the rent must appear on consecutive monthly bank statements, Miller says.