Mortgage lenders are required to get the last two years of tax returns for almost every borrower – and then prove that the tax returns are authentic and actually filed with the IRS.
IRS Form 4506-C
This is why every borrower has to sign an IRS Form 4506-C (formerly called a 4506-T) as part of their loan disclosures. The 4506-C is the formal authorization that allows lenders to request tax transcripts from the IRS through a 3rd party firm such as a credit reporting firm (lenders are not allowed to request transcripts themselves).
The tax transcripts are summaries of the tax returns that show the filer’s status (married, single, etc.), adjusted gross income, taxable income, etc., and the information has to exactly match the tax returns in the lender’s file.
I am blogging about this because the process can foster major delays and frustrations that are outside of a lender’s control – so this is an important topic for borrowers and agents to understand.
The IRS Often “Rejects” Transcript Requests
Almost all lenders order tax transcripts only after borrowers are in contract or, worse, after their loan is approved.
This is an issue because the IRS often rejects transcript requests – not because the tax returns are fraudulent but because there is usually some minor inconsistency with respect to the information on the 4506-C and the information on the tax returns (the 4506-C and the corresponding info on the tax returns has to match perfectly).
When the IRS does reject transcripts, it can delay a transaction by days or even weeks because lenders have to scramble to send another request – and start the waiting game all over (which can be anywhere from one to two weeks, depending on how busy the IRS is). The IRS also sometimes just loses requests or completes them incorrectly – which can also delay closings.
JVM Now Requests Client-Ordered Transcripts At Pre-Approval – To Avoid Delays
Because IRS rejections and/or delays are so common in our industry, JVM now requests borrower-ordered transcripts at the pre-approval level.
Many jumbo investors will not accept transcripts ordered by borrowers – but if borrowers can pull their own transcripts online without issue, we know we will be able to order them via a 3rd party without issue too.
Also, if we’re approaching closing and still waiting on 3rd party ordered transcripts (and we have client-ordered transcripts in hand), we can often fund the loan anyway – and then obtain the 3rd party transcripts after close (because we still need them to sell the loan).
If clients are unable to pull their transcripts, this is an immediate flag at the pre-approval level.
On top of this, seeing tax transcripts upfront can help illuminate tax payment plans that were previously undisclosed.
IRS “STAMPED” TAX RETURNS INSTEAD OF TRANSCRIPTS
In situations where borrowers are in the process of filing taxes, some lenders will allow them to file the taxes in person at an IRS office and get the returns “stamped” by the office. These stamped returns can then be used in lieu of the tax transcripts.
Not all lenders allow this, however. Hence, some lenders still require tax transcripts for newly filed returns, and that can take from three to eight weeks.
Founder/Broker | JVM Lending
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