How’s your income? This is the first of many questions a banker is going to ask when you apply for a home loan. Here is how tax returns play a role in your ability to obtain mortgage loan financing.
Generally, you need provide two years of 1040’s to a banker when applying for a home loan. In the mortgage process lenders ask you to fill out a document called a 4506. The 4506 document authorizes the lender whom you’re applying with to obtain copies of your tax transcripts for the most recent last two years. All mortgage companies obtain tax validations.
Lenders use tax returns to validate income in the following areas:
Self-employed individuals- a classic example is when you want to qualify for more house or get a bigger mortgage and you need your most recent year’s income in order to qualify. To use this income you will need your most recent tax return filed and IRS processed. Put another way, the tax return must be validated and processed with IRS so a transcript is obtainable, not simply “filed”. You will be unable to sign final loan docs until you lender has the IRS transcript back from your most recent tax return filing. A filed tax return that is not actually processed yet by IRS could delay your financial plans for awhile.
Rental Income-if you have a rental income property which generates positive net cash, tax returns are used to qualify not simply a current rental agreement. Lenders have a formula they use in factoring out expenses for a property that is owned free and clear of any debt. If the property is indebted with a mortgage, the net numbers tend to be lower as the revenue goes to paying carrying and maintenance costs first before net income is considered. Refinancing a rental property always helps as the revenue generated can offset a lower fixed cost resulting in favorable debt ratio when qualifying.
A word to the wise….
IRS is known in the mortgage industry for processing tax returns for taxpayers who are getting a refund faster than for taxpayers who owe. If you’re thinking about buying a home or refinancing one you already own any time from January through April and you need your previous years’ income tax returns to qualify you might have to do any one of the following:
- Check your tax professional to see if they can expedite the validation process for you.
- Visit an IRS office and check if they can escalate the validation process.
- Get an extension on your purchase contract
- Pay off debt to qualify if you have the financial means
- Refinance another home or credit obligation, lowering your debt load
All the above mentioned could be avoided by working with a sharp mortgage professional who would probably advise you to not pursue a loan until the income can be clear cut on paper especially, if there is a income complication.
Three income tax mortgage tips
*You may not need to provide tax returns at all if you are an employee that receives a year end w2. Automated underwriting by Fannie and Freddie tell the lender whom you’re applying with what specific documentation will be needed. In many cases just pay stubs and w2’s work are needed, easing the paper work gathering process.
*If you are off to a slow start and file an extension pushing your filing date till October, fear not an IRS filled out extension form will be needed by your lender to close on a mortgage transaction in lieu of the return.
*If you are recently self employed for less than one year, at least six months of self employment income identified on your tax returns would be needed to qualify.
Do your research and work with an experienced lender who is well versed in mortgage underwriting. This will help insure you obtain the best financial mortgage plan for buying or refinancing a home.
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