Mortgage Companies Now Required to Check Tax Returns Twice
Mortgage companies are now required by Fannie Mae and other major lenders to check the federal income tax returns of home loan applicants twice during the home loan application process – the first check at the start of loan application and the second check at closing.
The form used by mortgage lenders to check income tax filings with the Internal Revenue Service is IRS Form 4506-T. This form, which is filled out and signed by the loan applicant, authorizes the loan officer or the mortgage investor to obtain electronic copies of the federal income tax returns filed by the borrower.
According to Fannie Mae, it instructed mortgage lenders to check the tax filings of borrowers twice to ensure that applicants are telling the truth about their incomes, preventing fraud, loan losses and other related problems.
During the boom years, many mortgage lenders did not require home loan applicants to submit copies of their income tax returns. They figured that too many documentary requirements will discourage potential borrowers from pursuing their home loan applications. Many borrowers then took advantage of lax lending procedures, borrowing higher loan amounts to buy bigger houses.
When foreclosures battered mortgage companies, they soon realized that most of the foreclosed properties in their loan portfolios were the properties covered by the no-documentation loans they had provided.
Now, even if borrowers submit copies of their past income tax returns, lenders are still required by Fannie Mae to get electronic copies from the IRS using the 4506-T form.
The IRS, in response, has decided to lower the price of 4506-T electric transcripts to $2.25, half of the previous $4.50 fee charged. The IRS, which is prohibited from making money from income verification services, would be earning higher revenues because of the expected rise in demand for income tax checks if it did not reduce the fees.
Curtis Knuth, a top executive of NCS Inc. which supplies the mortgage sector with Form 4506-T, said the fee reduction is a big help for mortgage lenders complying with the Fannie Mae requirement.
Now that the Form 4506-T will be used more intensively, tax officials and other concerned parties are advising home loan applicants to pay more attention to the information they put on the form. Borrowers are advised to read the IRS instructions, to date their signature and to limit the return transcript years only to the tax years needed by mortgage companies.
