Lender’s Guide to Form 4506-T

The 4506-T is a request for tax return transcripts from the IRS. After the housing market crashed, Fannie Mae has made it mandatory for lenders to verify a borrower’s claim to income. Lender could have the applicant sign form 4506-T before or at time of closing the loan. We recommend doing it at the beginning, so that no time is wasted in case the candidate does not qualify. The filled form can either be submitted directly to IRS, which takes 30-60 days to process it, or to authorized vendors like us who can get the work done faster.

Form 4506-T is one of the most effective methods to mitigate any kind of mortgage fraud because it gives the lender an opportunity to obtain an applicant’s tax information from the IRS (see our previous blog post on this topic). Once the request is in, the information is provided very quickly and efficiently in an electronic format.

The detailed transcript includes tax records for a maximum of the past four years and includes details about the lender’s financial history such as individual income tax return, wage and tax statement, interests & mortgages, dividends, partnership income, etc.

Once you receive the transcript from IRS, you must use the information to validate the income document provided by the lender. The information should tally with the documents. However, there are certain instances when the difference is due to acceptable reasons. We have listed a checklist:

• Is the borrower applying alone even though he/she filed a joint tax return?
• Has the borrower recently changed jobs/line of work/promoted?
• Has there been a remarkable change in the borrower’s income?
• Was there any kind of additional income in the previous year, in the form of bonuses or other compensation?
• Is there any extra income now, which was not seen in the past?
• Has the borrower ever been in an income group that did not require him/her to file a federal tax return (income below $8950)

You must question any discrepancy in the information and look for answers in the documents provided by the borrower. If you do not have answers to these questions then you may need more documentation from the borrower or the IRS or both.