Following the financial crisis in the mortgage markets in 2008, lenders have increased the standards of document review and verification that are part of the loan process. Lenders are required as part of the Dodd-Frank Act to perform a thorough review of applicants’ financial records. Not only are applicants required to submit their W2’s, 1099’s and copies of their tax forms, they are also expected to sign a 4506-T IRS records release authorization giving the lender approval to cross-check the financial information that they are providing to the lender.
Using the 4506-T as part of the mortgage loan process is straight-forward.
After collecting the financial documents required by their firm, the mortgage lender will provide a 4506-T form to the prospective borrower. The document is easy to fill out and there are no fees to either the borrower or the lender associated with using the 4506-T. Additionally, each document request to the IRS requires a separate 4506-T. Since the request is to a government agency there is no inquiry made to or displayed by the credit reporting bureau reports.
While the IRS has 48 hours to process the requests, most documents are provided within 24 hours.
As part of the lender’s quality control and auditing procedures, the lender uses the record transcripts returned by the IRS to verify against the documents provided by the loan applicants.
Factors that can complicate the procedure include itemized deductions, self-employment losses and capital gains and losses. In these circumstances the lender will typically order additional IRS documents such as Schedule C Profit or Loss From a Business, 1065 Partnership Income Statement, Schedule D Capital Gains and Losses and 1120 Information on Certain Persons Owning a Corporation’s Voting Stock.
Discrepancies in the amounts provided by the borrower or net income amounts from what is obtained from the IRS by the 4506-T request(s), can result in changing the loan approval amounts that the lender is able to authorize.