Why Do Lenders Want Tax Returns?
There are several reasons why lenders want to review tax returns for the past two or three years.
First, they want to assure that the income you claim in your loan application is also the income you report to the IRS.
Second, if you are self-employed lenders may be able to “add back” items which are deductible for tax purposes but can be a mortgage application credit. For example: you are self-employed, work at home, and deduct part of your residence for business purposes. That can be a proper tax deduction, but lenders will add the amount deducted to your loan application income total.
Third, if a loan goes sour and must be foreclosed, lenders want a record in hand showing how the loan was underwritten.
Fourth, if a loan is sold, it may be among hundreds or thousands purchased at one time. The new owner will audit loans at random to assure they meet agreed standards. Part of the audit process can include a review of the underwriting file used to support the loan approval, including the tax records.
Under the Wall Street Reform Act lenders are required to verify income to qualify for the safe harbor provisions of the law. This means they will invariably ask for tax returns, W-2s and other evidence of income.
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