Why are Federal Tax Returns Important to the Mortgage Process?

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Mortgage and Lending with NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 IL Lic 031.0006220/WI

 

Why are Federal Tax Returns Important to the Mortgage Process?


     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.
     I can be easily found at:

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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                 IL Lic. #031.0006220  -  WI License #216987                                                                                                    

NMLS #175656

 

Gene Mundt, Mortgage Originator,  40+ years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking:  #Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in #Chicago and the greater Chicagoland region, including:  The #Lincoln-Way Area, #Will County, (#New Lenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Romeoville, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of Chicago, #Cook County, and elsewhere within IL and Wisconsin. 

 

Your Referrals & Testimonials are Always Greatly Appreciated! 

 

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Matt Kombrink 10/17/2013 06:40 AM
  2. Fred Griffin, on leave of absence from ActiveRain 10/21/2013 11:53 AM
Topic:
Lending / Financial
Location:
Illinois Will County
Groups:
Mortgages
Chicago Area Real Estate BUZZ!
Buyer Information - What Buyers Need to Know in Today's Market
Bananatude
WillCounty
Tags:
mortgages
buying a home
mortgage financing
income verification
mortgage process
federal tax returns

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Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Mike:  Definitely!  Knowing lessens the impact, no doubt.  And speeds the process too ..

Joan:  Great question!  They were used more sparing .. and certainly not required prior to the meltdown.  And not required on certain mortgage programs, such as Stated or No Docs

Oct 17, 2013 12:17 PM #6
Rainmaker
1,143,921
David Shamansky
US Mortgages - David Shamansky - Highlands Ranch, CO
Creative, Aggressive & 560 FICO - OK, Colorado Mtg

Gene... while I LOVE your posts, and do learn a thing or two as well (thank you) we BOTH know why this is the case. You explanation may be the "guideline" version but the reality is since the feds took over if you dont pay them in taxes you dont get them to endorse/insure or approve your loan.

Sort of the golden rule and since they have all the "fake" gold they make the rules for now. No taxes paid no loan to you!!!

Oct 17, 2013 12:21 PM #7
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Kathy:  I'm sure you and I could write a book about the creative math we have seen more than a time or two ...

Bill:  They keep refining the process, which typically means reporting in far more detail and documentation.  Maybe this time we've covered everything ...

Diane:  Hopefully it explains the "why" of our request for these documents ... Thanks for stopping by and commenting ...

Gene

Oct 17, 2013 12:22 PM #8
Rainmaker
820,143
Maureen Bray Portland OR Home Stager ~ Room Solutions Staging
Room Solutions Staging, Portland OR - Portland, OR
"Staging that Sells Portland Homes"

Gene ~ you've written another excellent post guiding buyers through the maze of lending requirements and documents.  It can be a tricky journey and being prepared is key!

Oct 17, 2013 04:26 PM #9
Rainmaker
2,256,034
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Great job with your post. A couple of years ago I did a mortgage application for a young man buying his first home. He was self employed and his tax returns for two years reflected about $45,000 each year and so he qualified for the home he was looking to purchase. I do a really good job explaining the 4506, but he must not have gotten it. When the transcripts came back, both years showed $30,000 per year less in income.

Some folks just don't get it.  

Oct 17, 2013 07:28 PM #10
Ambassador
1,439,216
Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Gene,

I cringed not too long ago when my lender told me that my clients hadn't filed taxes for the last two years. His wife didn't know either. It took a while to clean up, but they eventually did end up with a house.

Rich

Oct 17, 2013 08:07 PM #11
Rainmaker
171,062
Greg Miller
Ruoff Home Mortgage - Sarasota, FL
Florida Home Loans - Conventional,FHA,USDA,VA

Great post Gene, you are right on with your explanations. I have encounter many discrepancies over the years with the filed returns vs. the ones provided to me at application.Most work out okay and usually involves a forgotten amended return.

Oct 17, 2013 09:25 PM #12
Rainmaker
931,028
Kwee Huset
Kwee Huset Realty - Venice, FL
Venice Florida Homes For Sale

Hi Gene, excellent explanation. However the maximum number of mortgage loans a person are allowed  is limited to five?

Oct 17, 2013 11:03 PM #13
Rainmaker
396,729
Bill and MaryAnn Wagner
Wagner Real Estate Group - Ocean City, NJ
Jersey Shore and South Jersey Real Estate
Gene, We don't envy how complex and regulated your industry has become. Thanks for sharing the details of what you face in obtaining an approval on a loan. Sharing this with buyers gives them a better understanding of the process.
Oct 17, 2013 11:13 PM #14
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

David:  True enough ... they are in charge ...

Maureen:  Thank you .. you're always so kind and very supportive ...

Joe:  Yep ... sometimes what we see just doesn't jive with reality.  And it proves the point as to why we must now obtain Federal Tax Returns ...

Richard:  Unbelievable, that we run into these issues.  I always wonder ... what, they didn't think we'd notice or find out??

Greg:  You make a very valid point.  Typically there is a resolution to be found.  But it involves time to accomplish ...

Kwee:  Good question.  However, the answer is Yes and No.  It becomes more difficult to finance a property that is not one's primary residence if that person owns more than 4 properties and all are FINANCED.  We have options for Borrowers that own more than 4 properties, and up to 10 FINANCED properties with only Conventional Loan options in that scenario.

Bill & MaryAnn:  Exactly what I hope for when writing these posts ... educating my readers, whether client or referral partner.  Thanks for your thumbs up!

Gene

Oct 18, 2013 02:13 AM #15
Rainer
194,497
Stephanie Stringer
First Choice Loan Services NMLS#210764 - San Antonio, TX
Mortgage Loan Originator

Well said Gene.... You did a very good job on detailing the information out on the tax returns.  Those unreinbursed business expenses, are a big pain in the butt if not disclosed up front.   Some lenders will slap a good faith estimate out to their borrowers right away but if there is any indication of a schedule A being completed, I quickly look at line 21!  That's the BIG ONE... Great job Gene....

Oct 18, 2013 02:29 AM #16
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Thanks, Stephanie.  It's getting that we must do a whole lot of preliminary work and digging prior to giving an opinion of "lendability" ...

Gene

Oct 18, 2013 05:50 AM #17
Rainmaker
687,386
Pat Champion
Coldwell Banker Camelot Realty - Mount Dora, FL
Call the "CHAMPION" for all your real estate needs

Great explanation for buyer's I'll have to remember this if ever asked by a buyer. Have a great weekend.

Oct 18, 2013 05:51 AM #18
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Thanks, Pat!  Hope it proves helpful many times ...

Gene

Oct 18, 2013 06:10 AM #19
Rainmaker
3,090,411
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

Gene... another great post that provides useful and practical information to someone applying for a mortgage.

Oct 18, 2013 07:17 AM #20
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Thank you, Nina!  Hope the explanation clarified a few things for our readers ...

Gene

Oct 19, 2013 01:21 AM #21
Rainmaker
3,251,534
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

The mortgage application process can leave applicants feeling like the lender will know more about them than God....and that is the protection offered for both the Lender AND the borrower !

Oct 19, 2013 08:34 PM #22
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

True ... it can seem rather invasive at times.  But if you can tweak that perception to make a client feel that the added and indepth info actually serves a good purpose and helps them gain the best financing option available for them at that time?  That is the truth.  Does it serve the Lender's purpose as well?  Definitely .. a win win ...

Gene

Oct 20, 2013 02:09 AM #23
Rainer
49,960
Jared Garfield
Rich Life Real Estate Team - Buford, GA
Invest With The Best For The Highest Returns!

Gene, 

Great post, very well thought out and thorough, thanks for providing this information it's helpful for us to point these things out to our clients and you have provided some great information!

Oct 20, 2013 10:52 PM #24
Rainmaker
1,229,211
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Thank you, Jared.  Much appreciated.  Glad you found benefit in the info provided ...

Gene

Oct 21, 2013 03:03 AM #25
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Rainmaker
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708.921.6331 - 40+ yrs experience
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