Tax Return Issues are Rampant in Mortgage Lending
Tax Returns & the IRS Validation of the Returns Can Cause Closing Delays or Even Unexpected Loan Denials!
Most think that mortgage loans are as simple as providing a tax return that shows an income and the mortgage income verification is done. This couldn’t be further from what actually happens in the background which mortgage lenders are required by laws, lending agencies such as FHA, and/or by investors. A sampling of the things lenders are looking for that have to do with tax returns are as follows:
- Tax return transcripts from the IRS: This is to verify that the tax returns provided are the actual ones provided to the lender
- W2 transcripts: This verifies the W2’s provided are the actual ones
- Income tax debts owed: If money was owed on the most recent tax return, it could still be a potential outstanding lien or payment
- Additional business losses: There could be a business that has losses and could reduce the borrower’s total income
- Tax returns are actually filed: We have had a couple recently where borrowers provided tax returns for previous years that were never filed. This would never work because the tax returns could be change or never even get filed
- Extra properties that are owned: If the borrower is using a first time buyer product, there can’t be other properties listed or mortgage interest reported. Always disclose property you own
- Unreimbursed employee expenses: If a borrower is commissioned income accounting for over 25% and there are unreimbursed employee expenses written off, it could lower the qualifying income
- Business expenses paid by the business: Some products require that the tax returns show the debt being written off by the business to exclude the debt from debt ratios
- Determining nontaxable income: Some sources of income are nontaxable and to gross up the income, it must be shown as nontaxable income on the returns or some cases not shown on the returns if allowed
- And of course a good thing, trying to find any income that can be counted for the borrower
Most popular tax return issues that can delay a closing
Here are some examples we have seen lately:
- Borrowers providing tax returns that have not even been filed with the IRS – mentioned above. This is mortgage fraud so don’t try this!
- Income taxes not paid for previous years creating liens or payments – These could be required to be paid off or if a buyer is making payments, they may not be required to be paid off
- IRS or State Tax payments that must be counted in the buyer’s debt ratio – borrowers that don’t disclose this up-front could cause this not to be known until bank statements are received and reviewed
- IRS rejecting tax transcript requests because of identity theft – Identity thieves have been stealing tax payer social security numbers and tax refunds at an alarming rate
- Amending or just recently filing 2014 or earlier tax returns that do not show up with the IRS transcripts yet – Borrowers should mention up-front if there has been an amended return
We get the argument a lot from borrowers that this should not matter but most do not realize the amount of fraud or mistakes that are on tax returns and that is why lenders have to obtain transcripts of tax returns to close a mortgage loan in many circumstances.
So to avoid delays or issues late in the process, it is best to provide all documentation requested at once and up-front. Then it can be reviewed, accurate income and debt ratios calculated, and have more confidence later in the process.
Plus, We are Tax Return Experts