When you’re taking on a mortgage to purchase or refinance a property you must provide an ample supply of supporting financial documentation. One such document the lender is going to ask you for is to execute of 4506-t document.
The 4506-t is a tool the lender uses to validate the tax returns that you’ve provided in conjunction with your mortgage loan application. As a result, this document can be a double-edged sword. What otherwise is part of the normal mortgage loan process for some families could be problematic. For example, let’s say you’re a W-2 employee and there is some discrepancy in your previous year’s tax returns, or some issue associated with your tax returns. If you provide and sign the 4506 that the lender requests this could turn into something problematic for you and your previous issue associated with your tax return filing potentially could derail or deny your loan application. In such an instance a lender could use your W-2s and your pay stubs if you are an employee of a company that you don’t own to qualify. This route would omit the need for the 4506-t validation.
To be clear there is not a specific Fannie Mae or Freddie Mac guideline that requires you to sign and or provide a 4506 document so the lender can scrub your tax returns against IRS. It is a customary process though for most mortgage company to do a 4506 as the normal flow of doing business for example if you have income that otherwise needs to be identified on the tax return and you need that income to qualify a 4506 document is going to be required.
Following are such examples of when you would need to sign and provide a 4506
Self-employed income-If you were self-employed at all you’re going to have to provide the 4506 document and let the lender scrub the tax return that you provided against IRS and it needs to come back as IRS validated.
Rental income-if you receive any form of rental income and you need this income to qualify or if you have a rental property that potentially could become problematic with the 4506 documents.
Best rule of thumb is to make sure that you’ve been filing your tax returns if you’re legally required to do so based on your annual income, resolve any IRS debt because of filing your tax returns either paying that IRS debt off in full or having a monthly payment plan associated with that debt so the lender can account for that liability.
The biggest issue by far associated with the 4506 document is possible outstanding unknown IRS debt. Make sure when you’re looking for a loan that you have your financial house in order so to speak so your mortgage loan request can become seamless and simple.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.