Why does a mortgage company need a transcript of tax return?

When applying for a mortgage, the potential borrower is asked to submit several pieces of documentation to the lender. Documents that are typically required include recent tax returns, pay stubs, W-2 forms, statements from any bank and investment accounts and information about outstanding debts. A lending institution will also frequently obtain a transcript of the applicant’s recent tax filings. These transcripts may be requested for the previous year or the most recent two years.
Transcripts differ from tax returns in that they contain only the relevant information a lender would need to know, and they are issued by the IRS rather than provided by the applicant. The lender uses these documents to verify the applicant’s income and to reach a decision if the loan will be issued. Tax transcripts are used as a check against the other paperwork submitted by the potential borrower. If any discrepancies exist, the applicant will be asked to provide a reason for the inconsistencies.
The applicant will be required to sign a release form giving the IRS permission to send the document to the lending institution through the United States Postal Service. Since the document is sent to the lender directly, there is no chance for the information to be altered by the applicant.
The IRS requires written consent from the potential borrower before sending any tax information to an outside party. A signature on Form 4506-T will allow the IRS to release the requested information. Form 4506-T may be downloaded at IRS.gov, requested by calling 1-800-908-9946 or an online transcript request can also be submitted via the IRS website.
Due to the increasing concern about fraudulent mortgage applications, lending institutions now make it a common practice to require recent tax transcripts before a loan is issued. Comparing submitted tax returns to tax transcripts obtained directly from the IRS provides an additional layer of protection.