In the ever changing world of mortgages, you really need to stay on top of what is going on. So many think it's simple when pre-qualifying a borrower. But if you don't ask the right questions upfront and get very detailed, even the cleanest of deals could crash and burn.
So what is a 4506-t and what is its importance in the mortgage process? Basically it's a form used by lenders that allows them to request a transcript copy of your tax returns from the IRS. In the past, this form most times was used for those that were self-employed or to keep fraud in check. If a lender suspected something funny regarding your income, they could send this form to the IRS.
Your income is being examined very closely now by most lenders. No matter if you are self-employed or the lender/investor thinks there might be fraud involved, 4506-t's are being pulled on all borrowers. Now, I have heard some lenders brag that they aren't doing this, but is that true? I don't know, but I can tell you this, all the lenders that I know are doing this.
So I am a loan officer who pre-qualifies a borrower, asking them their current income situation. The primary borrower has a full time job at their current job of 8 years and makes a salary of $85,000 a year. Hey, it sounds cut and dry, right? Wrong !!! The borrower also has a side job in which she has been collecting and selling antiques for 3+ years. She even files taxes on this legally. Okay, so what's wrong? Well, she shows a loss on her tax returns. On a salary borrower, in most cases, we just have to collect W-2 forms for 2 years on FHA loans. Some lenders require the borrowers full tax returns no matter what. But what happens if your lender doesn't require this? Hence the reason now for the 4506t. When we get the transcript back from the IRS, it will list what she grossed on her primary job and show any other types of incomes, no matter if she showed a profit or a loss. In this case, the borrower showed a major loss, which had to be counted towards her income. And just because of this, it killed the deal because her qualifying ratios went through the roof.
Summary : No matter what the loan officer asks you, especially when it comes to your income, give them every bit of information for the last 2 years. If the loan officer tells you that they don't need your other sources of income, especially if it's showing a loss, just pick up and leave. Find a new lender. The 4506-t is extremely important and could be the difference of you moving into your house or not. And this doesn't matter if you are applying for a FHA loan, a USDA loan, a VA loan, or a conventional loan. It all comes down to the lender or the investor buying the loan.
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