Income verification and understanding how the 4506-T works

Income verification   It is necessary to get information from the IRS if you want to obtain final loan approval for most programs. Working with your mortgage lender can make it easier for you to know the right documents needed to qualify for a home mortgage.

Options for Income Verification 

Income verification is crucial in the loan borrowing process. Lenders will want to know your earnings so that they can tell how much you can qualify for. There are different ways a lender performs income verification; regular paystubs being the most common. If you receive a basic salary, paystubs and W2 forms show how much you earn annually. Third party verification from your employer called verification of employment (VOE) will also be used during the underwriting process. If your income is based on tips, commission or bonuses, 1040/1040A forms will play the role of showing the amount you report to the IRS. In many scenarios, the lender will ask for your past tax information from the IRS. To get this information, however, you and the lender will work together to complete a 4506-T form.

Requesting Tax Information From The IRS

The information they have is very wide and very crucial which when disbursed carelessly may lead to frauds and identity theft.  To avoid such, the IRS will need everyone requesting information from them to fill a 4506-T  form before the lender may request it. All the information on this form should be complete so that you or your lender can access the information. For Fannie Mae or Freddie Mac supported loans you will have to fill and sign this format on or before the day of the closing of your loan. Some situations may require multiple 4506 forms depending on if the IRS rejects a borrower's signature or personal information not matching their records.

A validated 4506-T form raises your chances of securing finance

Aside from the 4506-T forms, your lender will have to send it to IRS whether directly or through a designee that is authorized so that they can get your IRS transcripts. The forms that IRS will provide will prove income verification via how much you claim on your tax return.  If the lender has an alternative of verifying your annual income, then they will not need to have a 4506-T form.  In some cases, certain programs will not require tax returns & therefore would not require a 4506. The 4506-T form gives the lender access to other documents that they require to validate and verify your income. With the form 4506-T, the lender can now access 1040, 1040A, 1040Z, or W2 forms and 1099 forms. In some situations, the lender may require original IRS forms since the tax transcripts will not give enough information. Let’s say your income derives from self-employment. Then if the lender verifies through other means they may not require your tax returns forms. C, C-EZ and 1040, which are alternatives to the form 4506, can give the lender enough information about your income.

Submitting the IRS Authorization Form

As aforementioned, you will need to work with your lender in this process. Your part is to fill and sign the forms accurately.  The lender too will sign and indicate that they are the ones to receive the information. The lender will include their name or the name of the servicer. They will indicate that the information should cover all the years that will help the borrower qualify for the loan. Once the 4506-T is complete it is valid for only a specific amount of days that you initial next to. The lender will then document your information in a file.  The tax documents including the 4506-T form and the information from the IRS. Later the lender will use them during quality control. With tax season just around the corner, the IRS can take longer to process your most recent return.  This time of year, they may have a backlog and it can take 4-6 weeks to process a tax transcript.  Be sure this does not affect your loan closure.  Especially if your close of escrow occurs before a tax transcript can be sent by the IRS. Contact Casey Moseman and she can guide you through the process from start to finish.   She can advise on the required documents needed to qualify for a mortgage loan.