Reasons for Mortgage Pre-Approval | Tax Returns

This is part 5 in my series about why not to skip a single step in the Arizona mortgage pre-approval process called “Reasons for Mortgage Pre-Approval.”  See the rest of the series.

Reason #1: Tax Returns Contain Unforeseen Hurdles 

One critical step The HOUSE Team takes on all applications/pre-qualifications is to request a borrowers most recent 2 years Federal tax returns and/or order the most recent two years Federal tax return validations directly from the IRS for every new loan applicant.  Tax returns and/or tax return validations are required on each and every loan file before it can be approved and before it can close.  It is absolutely necessary to request these on the front end in order to avoid potential costly surprises.

Why?  Well, the truth is secrets tend to show up on tax returns and tax validations that may not turn up during an initial loan application consolation with a client.  What kind of secrets am I referring to?   Here are a few examples of what can show up on a tax return that directly impact a clients approval:

1. Schedule C business gain or loss
2. Un-reimbursed business expenses (form 2106)
3. Taxable or non taxable income
4. Capital and recurring gains or losses
5. Rental property income or loss

You might think that a lender should be able to obtain this information from the client when we take an application.  In a perfect world, that would be true. Oftentimes a client may not know the accurate answers to the questions we ask or more commonly they forget that they have an activity that impacts income such as a small side business that they claim a loss on every year (you would be amazed how often this occurs).

In either case, a loan officer needs to verify what information the buyer submitted to the IRS for the most recent two years.  In the end, this is the information that underwriting will base the buyer’s income on for loan approval.  If a lender does not verify a borrowers income/tax return, a buyer could be inaccurately pre-qualified based on an income higher than what an underwriter will allow them to use.   Not a good situation.  In fact, it is a quite costly one!

Typically a borrower will take the error filled pre-approval and run with it.  After all, they are emotionally charged and excited to find their new home!  When they actually find a house, pay for an appraisal, pay for an inspection, get attached to the home and eventually have their file submitted into underwriting the stage will be set for a disaster.  While you may find that many loan officers neglect to request tax returns and/or validations with the IRS, an underwriter certainly will not.

If it takes a day or two to make sure to get a qualification right by requesting tax returns and/or ordering tax transcripts trust me, it is most definitely worth the wait. Bottom line, a loan officer needs to verify a borrowers income with tax returns/transcripts before they can say for sure that the borrower if fully pre-approved.

These minor details can cause major hurdles when overlooked. Do not skip steps when getting qualified for a home loan! We can help you make sure that you have covered your bases!

By Jeremy House

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