Mortgage lenders are important because they make it possible for Americans to have homes. However, every time they offer a home loan, these lenders take a risk that the borrower may not be able to repay the money. Therefore, they need to look at as many documents as possible to determine if a borrower is capable of repayment.
There are many different documents mortgage lenders use to determine financial health. The most important ones are the borrower’s tax returns. With these, lenders can see the actual amount of money a person makes before and after deductions.
They can also see patterns of solvency or insolvency by comparing more than one year of tax returns. Keep in mind that when a lender looks at your tax returns, they are not only looking at one year of earnings. Mortgage lenders generally want at least two years of tax returns. For those offering certain government-backed mortgages such as FHA, VA, and USDA mortgages, then legally, they must have at least 2 years of returns.
When a company requests tax returns from a borrower, they will usually require that they are allowed to request the tax information themselves instead of receiving it from the borrower. This will require the borrower to fill out IRS form 4506-T which bestows the right-to-request tax returns on a 3rd party. This helps prevent any sort of fraud and protects the mortgage company.
Before the housing crash of 2007-2008, lenders were much more flexible when it came to tax returns. Stated-income loans became popular ways to prove financial health. These types of loans do not require tax returns. However, today, most lenders now require them.
As far as stated-income loans are concerned, they are still around, but legally, borrowers must show more proof of income than just a statement.