We have now reached that awkward time of the calendar year...that time of year when Borrowers have received their W2 & 1099's for 2018, but have not yet filed their 2018 Federal Tax Returns. While this awkward time occurs each year, many Real Estate & Mortgage Professionals remain ill-prepared for what this means for Banks...and more specifically...FUNDINGS.
Banks believe in "checks & balances" in order to cross-validate material facts represented in the loan file. As anyone can punch in numbers into software programs like "Turbo-Tax" and present these numbers to a Bank when applying for a loan, the Banks understand this risk. As a precaution, Banks require verification of IRS Tax Transcripts to make sure the numbers on the Tax Returns presented with the loan application match the numbers submitted to the IRS at tax time. In other words, Banks check their facts. Do not commit loan fraud! If you do, the Federal Bureau of Investigation (FBI) will pay you a visit. You have been warned!
While different Lenders/Investors may have different underwriting guidelines for different employment reporting scenarios, below is an example of what many Banks, Direct Lenders, Credit Unions, and Brokers will specifically require.
Remember the Golden Rule of Lending...those with the Gold (Money) make the rules. Specifically, Banks get to decide what they require before wiring hundreds of thousands of dollars to help us close our escrows. Knowing the rules of the game will help us represent our clients to our highest & best abilities.
W2 Wage Earner and/or 1099 Fixed Income Borrowers:
Transcripts are not required for these Borrowers! This policy is applicable for Conventional, FHA, VA, and USDA programs. If your Lender is requiring these transcripts and your escrow is being threatened, please feel free to contact us for assistance. The IRS has made it clear to us on many occasions that they are not going to rush transcripts, regardless of the reasons for our request. I can only imagine the backlog that might be caused by the Government Shutdown. Let's not make any assumptions that we can convince an IRS Employee to comply with our requests.
Transcript requirement for Borrowers whose income is based on Tax Returns (Borrower(s) Self-Employed and Non-Self Employed):
- Self-Employed Income
- Employment by a family member or an interested party to the purchase transaction
- Rental income from an investment property
- Temporary or sporadic income
- Other income sources as identified by guidelines pertaining to loan type
Note: Transcript requirement may fall in line with required income documentation per Automated Underwriting System (AUS) findings. If DU/LP only require one year tax return, only the most recent tax transcript is required.
Note: Under no circumstance will the use of income from 2017 tax returns be used to qualify without also obtaining 2017 tax transcripts to match.
If income must be documented by tax returns, and use of 2018 tax return & income is required to qualify, the loan file must contain the following:
- Transcripts from the prior years tax returns in accordance with the number of years required to be documented per the AUS findings, AND...
- No Record Found for 2018, AND...
- Documentation acknowledgment of receipt (such as IRS officially stamped tax returns or evidence of electronic submission. If the 2018 tax return indicates BALANCE DUE, you must document that the obligation is:
- Paid in full
- Installment agreement in place
- If the 2018 tax return indicates REFUND DUE, there is no requirement to document the Borrower has actually received the refund, but we must validate through the IRS website "where's my refund feature" that this information matches the returns in the file
In short, these problems/delays often manifest for escrows closing in the months of March & April each year. To insure smooth escrows, I highly recommend that all Realtors be mindful and aware of these dynamics, maintain an open & proactive dialog with their Lenders, and caution their Buyers/Borrowers to act swiftly when documentation is requested.
Hope this information is useful. Contact me if/when you have any questions and/or need assistance.