The majority of mortgage providers, including FHA, VA, USDA and Fannie May (FNMA), use the 4506-T form to verify borrowers’ income. The primary exceptions are lenders who offer no-document loans to applicants with excellent credit.
What is Form 4506-T?
Form 4506-T is an IRS document that lenders use to obtain transcripts of their applicants’ most recently filed tax returns. The borrower signs the form, giving permission for a third party to review the documents, and the lender submits it to the IRS. The signed form is valid for up to 120 days from the date of signature. The IRS requires a separate 4506-T for each document ordered, such as 1040, 1120 and 1065. Ordering options include:
• Return transcript with most of the information on the filed return
• Account status, which shows whether the tax payment is current
• Record of account, combining the return transcript and account status
• Verification of non-filing, if applicable
• Transcript of form W-2, 1099, 1098 or 5498
Why Do Most Lenders Use Form 4506-T?
When the real estate market was riding high prior to 2008, mortgage brokers took many shortcuts, streamlining the loan process to meet the increasing demand for mortgages. The subsequent housing market crash was a harsh reminder to lenders about the importance of verifying borrowers’ income.
Reviewing official tax returns helps lenders confirm reported income, an important factor in loan qualification. Depending on the borrower’s situation, lenders may also review such tax data as deductions, business losses and capital gains to determine adjustments to qualifying income.
Such scrutiny not only clarifies borrowers’ annual earnings but is also a way to detect fraud. If the numbers on the loan application and the tax return don’t match up, the lender will ask for further information to find out why.
What is a No-Doc Loan?
A no-doc loan requires borrowers to submit only a limited number of forms to obtain home financing. The lender’s decision to fund such a loan is based on a good to excellent credit history rather than income verification. While this type of mortgage may be a good choice for those who are self-employed or do not have verifiable income, no-doc loans typically come with higher than prime interest rates and require significant down payments. The greater expense of such financing is meant to offset the increased risk the lender is assuming by waiving the usual documentation.
Pros and Cons of Form 4506-T
This IRS authorization form offers many benefits for lenders and borrowers, including:
• Ease of submission
• No associated fees
• Does not affect credit history
• Helps lenders make a definitive financing decision
Some borrowers consider the drawbacks of Form 4506-T to include:
• Unwarranted invasion of privacy
• Implication that information already provided to the lender is questionable
• Requirement of a separate form for each type of transcript
• Potential delays in loan approval
While signing Form 4506-T is not required by law, those who wish to obtain a mortgage will have to do so in most cases. Since it is a tool for verifying the information already provided to the lender, it is actually no more invasive than a loan application. Those who have given accurate financial data need not be concerned.