How Do 4506-T Forms Affect The Mortgage Process

Approved Mortgage application form with a calculator, pen and glasses

Form 4506-T is an official request to the Internal Revenue Service to provide your federal tax information to your mortgage lender. For the lender, this form provides critical verification of the income you report in your loan application. For you, it means that the figures you provide on your application must accurately reflect the information you previously filed with the government. If not, your loan officer will have to recalculate the amount you qualify to borrow or deny the loan.

How a 4506-T Works

When you apply for home financing, your lender will obtain authorization to access to your tax records. By signing form 4506-T, you provide this authorization for up to 120 days. The IRS requires a separate 4506-T for each tax transcript ordered.

Often, lenders request only a transcript of the 1040 form. If you are self-employed, your loan officer may send for complete transcripts. In this case, you would need to file a 4506-T for each document in your tax return, including such forms as 1065 and 1120. The lender can request transcripts of each form going back several years if necessary. [1]

Potential Areas of Discrepancy

Due in part to the home mortgage and financial crisis of 2008, the loan application process is stricter than ever. You should expect to provide your banker with copies of W-2s as well as your entire tax return. Form 4506-T provides a way for the lender to crosscheck your copies with IRS records, and rule out inconsistencies and fraud. [2]

If you are self-employed, your tax returns may reveal discrepancies that could lead to adjustments to your loan application, including:

• Significant income differences from year to year that call into question your financial stability
• A reported business loss for the previous year that the loan officer may deduct from your current year’s reported income
• A significant total of unreimbursed business expenses that may decrease your reported income
• Unpaid back taxes that the lender requires you pay prior to approving your loan

Avoiding Potential Issues

If you plan ahead for a future home purchase, you can take steps to hedge against these discrepancies. For example, you could put off buying a home until your income has been stable for several years. You can demonstrate that a business loss you claimed in one year was an anomaly rather than an annual event. Also, you could refrain from deducting unreimbursed business expenses from your taxes prior to applying for a mortgage.

Most importantly, whether or not you are self-employed, staying current on your tax payments demonstrates solvency and credit-worthiness to your lender. It also helps you maintain a healthy credit score.

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