If you are looking to purchase a home, you may be reading how guidelines and requirements have become more stringent. You may also read that there is a lot more documentation required than in the past, in order to get approved for a loan. This is true, but remember that it is all for good reason. We don’t want to repeat our past and have another real estate crash, we want to learn from our mistakes.
That being said, one of the main requirements for every file going through underwriting, lenders have to pull IRS transcripts. When you sign your loan application one of the disclosures you are required to sign is the 4506-T (giving your lender the authority to request your tax transcripts), usually only for the last two years. However, sometimes depending on your loan and the discrepancy of the underwriter it can be up to three years.
When you are getting “pre” approved you are asked to send your last two years tax returns. Lenders need to review these along with your W2’s, paystubs and bank statements. In getting your pre-approval loan officers do not typically ask for your tax transcripts . In reality, at this point you may still be shopping lenders and you have not signed a loan application. So tax returns are sufficient for a loan officer to issue a pre-approval on your behalf.
Recently we have had a few clients loan approvals almost get killed due to the tax transcripts. Why? Because after requesting and receiving them we found out that the tax returns were never filed! This is a huge issue, it can kill the deal! And really should have been mentioned to the loan officer, not left to be found out when clients are under contract to buy a home already.
You may be asking, “why can’t a lender catch this early?”, why would it be caught AFTER you have received a lender letter and went under contract and your file is in underwriting? The answer is remember when I stated that when you sign your loan application you sign a disclosure to request your tax transcripts? This usually isn’t done until you are under contract and have signed an application to be submitted to the underwriters for formal approval. So when you submitted your tax returns for review, the lender will assume it means you filed them! Reviewing taxes is different than tax transcripts. Transcripts is the proof from the IRS that your taxes were filed and processed. Big difference! *Quick note: if you owe the IRS money, don’t assume that they will be mailing you a statement to collect from you, they don’t work that way. You are responsible for contacting them to set up a payment plan if needed.
The best advice I can give is that you need to be honest with your lender, don’t think this is something that can sneak by. If so, you are jeopardizing your loan approval. Better yet, don’t get pre-approved until you have filed your taxes! Don’t kill the deal!