After the housing market crash of 2008, lenders have increased the amount of verification needed to qualify for a mortgage loan. One of the current requirements is form 4506-T, which is an IRS form that requests a tax transcript. This form has been in use for years, but usually only for borrowers with unordinary income and only at closing. Now, however, lenders are asking for the 4506-T from everyone up-front and at closing.
The reason for this increased income verification is that a lot of loans prior to 2009 had exaggerated income statements that led lenders to approve mortgages based on higher incomes. This occasioned many foreclosures for people who could not make the mortgage payments.
Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government-sponsored enterprises created by Congress. They do not originate loans but instead purchase secondary mortgages. These two major enterprises have required lenders to obtain the 4506-T both at the application and at closing for all loan applications since September 1, 2009.
Form 4506-T ensures that the income information provided on the mortgage application matches the actual tax returns filed by the borrower. If the income amounts do not line up with the tax return amounts, then the lender can either modify the original application to align with the tax return or deny the loan request.
The borrower specifies the year(s) of tax returns transcripts needed. A maximum of four years is available for request, but borrowers can request a fewer number of years. This is important because borrowers should only have the relevant tax year information given to the lender.
Having just the necessary information sent to the lending institution curtails the amount of personal information that can be viewed by numerous and unknown people at the lending institutions. With the increasing amount of personal information fraud, borrowers should always protect their personal information as much as possible.