As you get your documents ready for mortgage approval, you probably have many questions. What you need to provide is often the most asked question. How far deep into your income does the lender need to dig? Are your paystubs enough? What about bank statements and income tax returns? Does every applicant have to provide those documents? Every situation is different, but the one answer across the board is that not every person needs to provide tax documents, but you have to meet certain requirements in order to not need them.
How are you Paid?
The first question to ask yourself is how are you paid? Do you receive regular paychecks on a weekly, bi-weekly, or monthly basis? If you do receive paychecks, you are on the right path, but you have to take it one step further. What type of income is that you receive on your paychecks? Do you receive a salary, commission, bonus, or a combination of the three? This is what determines whether or not you need to provide your tax returns for mortgage approval.
If you are a salaried employee and your income never changes unless you get a promotion or raise, you probably do not need to provide anything more than your paychecks and W-2s for the last two years. On the other hand, if your income is fully or partially comprised of commission or bonus income, you will need to provide your income tax returns for verification purposes.
The reason behind the lender requiring your tax returns is for them to compare the income reported on your returns to the income on your W-2s. If there is a discrepancy between the two, the lender needs to figure out the reason why. Generally, it is because people that work on commission and/or bonuses have expenses that come out of their own pocket. These people then write these expenses off, which comes off of the top of their income. Mortgage lenders use the income that you report after the expenses, rather than before for your qualifying income in order to ensure that you can afford the loan.
Do you Own a Business?
If you own a business, you will always have to provide your tax returns to the lender for qualification purposes. The tax returns will show the lender not only how much money you bring in, but also all of your expenses. Generally, there are quite a few expenses that business owners write off including depreciation. In addition, many business owners have business losses or capital gains that need to get figured into the household qualifying income to determine if you are eligible for a loan.
What other Income do you Have?
Even if you are a salaried employee with straightforward income and no unreimbursed employee expenses, there is another case where you would need to provide your income tax returns and that is if you are a landlord and rent property out. If you do rent a property out, the lender needs to see what types of expenses you have. They cannot use the amount of rent you charge at face value – they need to see what the net rent is that you receive. For example, if you charge $1,500 per month in rent, but it costs you $500 per month to keep the property maintained and running, then you only take in $1,000 in rent. The lender needs to see these expenses and use the proper income in order to qualify you for the loan.
Income Tax Returns Tell a Story
Your income tax returns help the lender figure out your financial story better than any other document can do. Because most lenders must use the money that you report to the IRS and no other income, you are able to show your true financial worth this way. For example, if you do not claim the rental income you make every month, the lender cannot use it for qualifying purposes. On the other hand, if you have commission income that varies, but you do not write off any expenses, the lender can use the full value of that income on an annualized basis.
The tax returns help the lender figure out what he should do and how risky your loan file really is after digging deeper than your paystubs and W-2s. The tax returns are official documents that must match up with the transcripts of your tax returns the lender can request from the IRS with IRS Form 4506-T. This way you are able to prove your worth alongside your compensating factors, such as assets and good credit in order to obtain the mortgage financing you desire.