Does Your Lender Need To See Your 2016 Tax Returns?

14 Feb

Does Your Lender Need To See Your 2016 Tax Returns?

By Doug Goelz, Mortgage Services

At this time of year, tax returns can be a hurdle for some borrowers when they are applying for a mortgage. If you are self‐employed, own properties other than your primary residence, and/or have complicated sources of income, tax returns may be required when you apply for a new mortgage. In particular, if your self‐employment business made more money in 2016 than in 2015, and you need the additional income to qualify for your new mortgage, lenders will need to see your filed 2016 tax returns.
If you are salaried and do not have a side business or own investment properties, lenders generally do NOT need to see your tax returns.

Before April 18, 2017, lenders cannot require that your 2016 taxes be filed (the filing deadline is a little later in 2017 than in other years because of the weekend and a Washington, DC holiday). However, if you are applying for a mortgage and you need to prove information that would show on your tax returns (such as net income for your business or rental income for a property), you will need to produce your FILED 2016 tax return, even before April 18, 2017, in order to have your loan approved.

In the past, as a fraud deterrent, lenders have obtained IRS transcripts (records from the IRS showing the information that was filed) to verify any income tax forms that a borrower provided. Lenders compared the paper documents provided by borrowers to information the IRS had in their system. However, it took weeks (and sometimes months) AFTER someone filed their taxes for the IRS to make the transcripts available. This was a big problem in years past when clients applied for a mortgage in the first half of the year AND they needed to provide their tax returns.

This year, most lenders are not requiring IRS transcripts even if a borrower has to provide 2016 tax returns. Nevertheless, lenders still want to verify that the paper documentation they get from the borrower was indeed filed with the IRS. If you need to provide 2016 filed tax returns when you apply for your mortgage, here is additional documentation that many lenders will accept to make sure that the tax returns you provide also were filed with the IRS:

  • Copy of Your Returns, Stamped by the IRS ‐ If you take your tax returns to the IRS office to file them, the IRS will accept your returns, and give you a copy back with a stamp indicating that the 2016 Tax Returns were filed with the IRS.
  • Email Confirmation of Electronic Filing ‐ If you file your taxes electronically, you will get an email confirmation from the IRS indicating they received the e‐filed 2016 returns.
  • Proof of Tax Refund ‐ If you got a tax refund, you can show the amount of your tax refund as calculated on your tax return deposited into your bank account. If the IRS sends you a check for your refund, be sure to keep a copy of the check, too.
  • Proof of Tax Payment ‐ If you owed taxes, you can show proof of payment to the IRS (e.g., a cancelled check) for an amount matching the 2016 tax returns.

If you are planning on getting a new mortgage in the next few months, be sure to talk with your mortgage broker or lender soon about the income tax documentation you will need to provide when you actually apply for the loan. You may need time to get your taxes filed, and to get the documentation listed above. You don’t want to get into escrow for the purchase of a property and then realize the lender requires tax documentation that will take weeks to obtain before they will close your loan.
Questions? Feel free to get in touch with me at 415‐730‐4665 or doug@emortgageservices.net.