A recently submitted file reminded me yet again, of the pressing need within Mortgage Processing for Income Verification to the "n'th degree" ...
The topic of Income Verification is sometimes a topic that mystifies my Mortgage applicants. They question why they must produce so much paperwork and so many documents. The requests seem "over the top".
A Mortgage Lender requires that Borrowers provide a Federal Tax Return, including all Schedules, W-2's, 1099's, and also that the IRS confirms those figures via tax transcripts. Current lending requirements demand that most, if not all, loan files include a signed 4506-T (IRS Form #). This form allows and authorizes the Internal Revenue Service (IRS) to confirm the filings of a Borrower (and Spouse/Co-Applicant, if applicable).
These transcripts validate the copies given to the Mortgage Lender by the Borrower(s). Given the Mortgage Industry's recent issues, it's now mandatory and logical that Lenders request this information verifying Income.
Whena Mortgage Lender obtains:
- Copies of paystubs
- Sends a VOE (Verification of Employment) to an Employer that also shows a client's earned income for the current year and two prior years ...
Why are Federal Tax Returns also needed? And what is an Underwriter looking for on the client's Tax Returns and Schedules?
A Federal Tax Return (Form 1040, 1040A) speaks to the total income earned and filed with the IRS. Because income can be generated in several ways and is supported by various documents, even an hourly-paid, W-2 employee can have a uniquely completed return, should they have any of the following:
- Side business
- Investment income (dividends and interest)
- An additional pension from a prior occupation
- Unemployment income
- Social security benefits
- Real Estate Holdings
- More ...
But what if the "side business" is struggling and showing a loss ... and is running at a deficit? And what if the employee showed "Unreimbursed Business Expenses" (Form 2106) that literally are deducted from the gross, reported, W-2 income?
These two scenarios are fairly common. And if not addressed and accounted for, can take a loan file from Approval at 49% DTI (Debt-to-Income), to a Denial at 51% DTI after the negative adjustments to Income are made.
Without a thorough and careful review of a Tax Return, and its supporting Schedules, a Loan Officer and their transaction are open to an Underwriter's Review. That can absolutely change what appears to be an approved loan, into a denied loan if the Income Calculation is reduced.
Other common errors made surround those of:
- Self-Employed Borrowers
- Borrowers that have Multiple Income Properties
- Borrowers with a Commercial Property that have filed Tax Returns and Schedules that show the property is owned personally and has a "negative" cash flow.
The bottom line is that the act of providing Tax Returns is important to the Mortgage Process and Approval of a Mortgage. Tax Returns do matter, as do all the factors that impact Income ...
* Hoping to Buy or Refinance a Home in a Lincoln-Way Community, Will County, or elsewhere in Chicagoland. Contact Me. I'll put my 36 years of mortgage experience and expertise hard to work on your behalf.
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