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When do Mortgage Lenders require federal income tax returns to document income?

SELF EMPLOYED MORTGAGE LENDERS QUESTIONS AND ANSWERSWhen do Mortgage Lenders require federal income tax returns to document income?
shaamrock Staff asked 1 year ago
What are the employment documentation requirements?

Employment income refers to income received as an employee of a business that is reported on IRS Form W-2.  For employment related income, the Mortgage lenders must verify the mortgage applicants most recent 2 years of employment and income and use one of the following documentation methods:

TRADITIONAL DOCUMENTATION – CURRENT EMPLOYMENT  WITH NO  TAX RETURNS

Obtain the most recent pay stub and one of the following to verify current employment:

  • written Verification of Employment (VOE) covering 2 years; or
  • electronic verification acceptable to FHA.

ALTERNATIVE  DOCUMENTATION – CURRENT EMPLOYMENT WITH NO  TAX RETURNS

  • obtain copies of the most recent pay stub that shows the Borrower’s year-to-date earnings;
  • obtain copies of the original IRS W-2 forms from the previous 2 years; and
  • document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified.

RE-VERIFICATION OF EMPLOYMENT WITH NO  TAX RETURNS

Re-verification of employment applies to both traditional and alternative documentation methods and must be completed within 10 days prior to the date of the Note. Verbal re-verification of employment is acceptable.

PAST EMPLOYMENT DOCUMENTATION WITH NO  TAX RETURNS

Direct verification of the Borrower’s employment history for the previous 2 years is not required if all of the following conditions are met:

  • The current employer confirms a 2 year employment history, or a paystub reflects a hiring date;
  • Only base pay is used to qualify (no Overtime, Bonus or Tip income);
  • The borrower executes IRS Form 4506, Request for Copy of Tax Return; IRS Form 4506-T, Request for Transcript of Tax Return;or IRS Form 8821, Tax Information Authorization, for the previous 2 tax years.

If the applicant has not been employed with the same employer for the previous 2 years and/or not all conditions immediately above can be met, then the Mortgagee must obtain one or a combination of the following for the most recent 2 years to verify employment history:

  • W-2(s);
  • VOE(s);
  • electronic verification acceptable to FHA;
  • evidence supporting enrollment in school or the military during the most recent 2 full years.

In general US mortgage lenders only requires that federal income tax returns be provided when one or more of the following income sources are being used to qualify:

 Mortgage applicants are tying to use Income from interest and dividends;
 Mortgage applicants are tying to use Income from self-employment (defined as a 25% or more ownership in the business);
 Mortgage applicants are tying to use Income reported to the borrower on schedule K-1 (regardless of percentage of ownership).
In these cases, the tax returns provide the underwriter with a more comprehensive view of the borrower’s
income, and enable identification of any related expenses that may need to be factored into the income
calculation.
 Mortgage applicants are tying to use commission earnings that amount to 25% or more of the borrower’s total employment income;
 Mortgage applicants are tying to unemployment by family member(s) or an interested party to the purchase transaction;
 Mortgage applicants are tying to use rental income from an investment property (if acquired prior to the most recent tax filing);
 Mortgage applicants are tying to use Income from temporary or sporadic employment (for example, seasonal income);
 Mortgage applicants are tying to use Income reported on IRS Form 1099 (for example, capital gains, royalties);
 Mortgage applicants are tying to use Income earned from a foreign corporation or foreign government and paid in foreign currency;
 Mortgage applicants are tying to use Income earned that cannot otherwise be verified by an independent and knowledgeable source;

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