When people borrow money from lenders like banks and credit unions to buy a new home or they refinance an existing mortgage, they are asked to submit IRS Form 4506-T Request for Transcript of Tax Return to confirm past and most recent tax return income data via IRS transcripts. Before the housing bubble broke, lenders often approved loans based on an honor system where they took verbal confirmation of income from new borrowers and existing homeowners instead of hard copy confirmation from tax returns. Many borrowers lied about having higher incomes so that they could get bigger loans and better homes and then failed to make payments. These loans became known as “no documentation” or “liar” loans.
The Federal National Mortgage Association now requires that lenders request 4506-T both during the application process and then at closing to prevent this type of borrower fraud. With the approval of the borrower, 4506-T can supply a third party like a lender with four years worth of tax return income details. The cost of this double verification is usually presented by the lender as a free or fee-based service. In fee-based situations, the borrower might see the fee listed separately on paperwork or the lender might tell the borrower that the fee is included in the paperwork processing fees. Since it can take up to 60 days for the IRS to send the transcripts, a borrower should always date the form on the same day that they sign it.
Some lender and investor representatives have abused the trust of borrowers who gave them access to this private financial data by continuing to pull transcripts long after they no longer technically needed the details so that they could continue to check borrower income. As a result, it is important that borrowers restrict lender access by filling out every line of the form and only requesting returns for applicable years.