As part of the mortgage underwriting process, you’ll often be asked to produce your prior tax returns.
If you’re securing a mortgage, it’s safe to say you’re in it for the long haul – it’s a big deal and a major long term financial commitment for you, and for your lender. So, they ask for documentation that offers a clear picture of your current and projected income stream. The lender wants to make sure you’re not a risky investment before approving your application. In many instances, as part of this process, they ask for prior year tax returns. Here’s our quick guide to what mortgage lenders are looking for, and why:
Why does the lender want to see my tax returns?
Generally speaking, if the lender is asking to see your tax returns, it’s because you are generating income that doesn’t include W2 wages from an employer. The underwriters will want to see a two-year history suggesting that you not only earn enough to afford the mortgage repayments, but that you have maintained a pretty steady trajectory. You will also need to provide your tax returns if you declare income from dividends on your mortgage application or collect rental income. In that case, the lender will need to review the schedule E form that accompanies your tax return.
What is IRS Form 4506-T?
In the run-up to the 2008 housing crisis, some lenders overly relaxed their underwriting standards, accepting tax returns without IRS verification. Fortunately, things have since changed for the better, and lenders may now ask you to sign IRS Form 4506-T. This form allows them to secure an exact copy of your tax return from the IRS, thus verifying your true income and minimizing the possibility of fraud.
What are lenders looking for if I’m self-employed?
If you are self-employed, lenders will want to review your itemized deductions, level of ownership, and a current profit & loss (P&L) statement. If you are incorporated, or have formed a partnership, it’s especially important for lenders to see those tax returns, since they dictate how much personal income is considered eligible toward your mortgage application.
Next steps
Overall, lenders are looking to determine that you have a history of generating steady income. If you’ve switched jobs numerous times over the past two years, or if your pay has steadily decreased during that period, it might make loan underwriters uneasy. Be prepared to explain any unusual activity—the more detailed a picture that you are able to provide, the better a lender will understand the specifics of your situation.
You can save yourself time and hassle by keeping your prior two years’ tax returns somewhere secure and accessible, just in case you’re asked to produce them when the time comes to apply for a mortgage. And, if you still have questions regarding the mortgage application process, feel free to set up a call with one of Simplist’s licensed loan experts. They’ll be happy to answer any questions you might have, and can help to ensure you’re approaching this exciting phase of your life from a place of confidence! Get in touch today.