Giving a pound of flesh in income and asset documentation has become the norm but it’s likely that unjustified lender paranoia has led them to ask for a bit too much of their clients. My recent rant on this issue concerned
verifying large, non-payroll deposits but now my rage has turned to the simple request of tax returns. I’m not talking about FHA loans, VA loans, RD loans or Freddie Mac loans (although if you’re curious about Freddie, see attached), because if you’re looking for one of these, you’re going to be asked for a lot of paperwork. I’m just talking about your plain Jane Fannie Mae loan. If you’re looking for one of these loans, and I can see why you would, don’t let yourself unjustly be put through the Spanish Inquisition.
A little background. . . Everyone will be asked to sign an IRS 4506t form, with which lenders can authenticate supporting loan documentation and use for quality control. So no matter what, your lender will have authentic data from the IRS pertaining to what your income was. After this, collecting the paperwork may seem extraneous but two years of tax returns are needed, by Fannie Mae guidelines, in the following 10 instances where the loan applicant. . . :
- earns 25% or more of his or her income from commissions;
- is employed by family members;
- is employed by interested parties to the property sale or purchase;
- receives rental income from an investment property (only one year of tax returns is required unless the applicant meets one or more of the other conditions in this list);
- receives income from temporary or periodic employment (or unemployment) or employment that is subject to time limits, such as a contract employee or a tradesman;
- receives income from capital gains, royalties, real estate, or other miscellaneous non-employment earnings reported on IRS Form 1099;
- receives income that cannot otherwise be verified by an independent and knowledgeable source;
- uses foreign income to qualify;
- uses interest and dividend income to qualify; or
- receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest (10% for Freddie Mac). Borrowers with a 25% or greater ownership interest are considered self-employed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers
Too many times, an underwriter who also underwrites VA, FHA and RD loans will cross disciplines or blur the lines of underwriting between loan types and end up underwriting a Fannie Mae backed loan as though it were a different type of loan. So does this fit you? If it doesn't, and you’re being asked for tax returns on a Fannie Mae backed loan, you’re being unjustly put through the ringer on income documentation.
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