Home > 2016 > Mortgages

How to Make Sure Your Taxes Are in Shape So You Can Buy a Home

Advertiser Disclosure Comments 0 Comments

How’s your income? That’s the first question a lender is going to ask when you apply for a home loan. And, at some point during the application process, the lender will likely use your tax returns to validate your answer. Here is how your tax returns may play a role in your ability to obtain a mortgage.

What Do Lenders Need to See?

If you’re a full-time, salaried employee, paystubs and a W-2 will likely be sufficient for verifying income, even if some of it comes through bonuses or commission.

However, you may have income from other sources in addition to your full-time gig, or maybe you own an investment property as well. Mortgage companies may require you to provide tax validations prior to closing.

Automated underwriting by Fannie Mae and Freddie Mac tells the lender what specific documentation will be needed. In many cases, borrowers are asked to provide two years of 1040s and to fill out a document called a 4506-T. This document authorizes the lender to obtain copies of your tax transcripts for the past two years.

In my experience as a loan officer, there are a couple of common situations where you’ll need a tax validation in order to complete the mortgage process. Here they are.

1. The Income of a Self-Employed Individual

Lenders may be required to obtain a two-year history of prior earnings to verify the income of self-employed borrowers, according to Fannie Mae.

To use your most recent year’s income, you will need to have your most recent tax return filed and processed by the Internal Revenue Service. Put another way, the tax return must be validated and processed with IRS so a transcript is obtainable, not simply “filed.” You will not be able to sign final loan documents until your lender has this transcript in hand. A tax return filed with IRS for the most recent year that is not actually processed could delay your financial plans.

2. Rental Income

Tax returns (and not simply a new rental agreement) are generally used to verify that you own a rental property that generates positive net income. Lenders have a formula they use to factor out expenses for a property that is owned free and clear of any debt. If the property is indebted with a mortgage of some kind, the net numbers tend to be lower as the revenue goes to paying maintenance costs before net income is considered. Refinancing a rental property may help as the revenue generated can offset a lower fixed cost, resulting in a favorable debt ratio when qualifying.

A Word to the Wise

The IRS has been known within the mortgage industry for processing tax returns to taxpayers who are getting a refund faster than for taxpayers who owe. If you’re thinking about buying a home or refinancing one you already own any time from January through April and you need previous income tax returns to qualify, you might want to do any one of the following.

  • Check with your tax professional to see if they can expedite the validation process for you.
  • Visit an IRS office and ask if they can escalate the validation process.
  • Get an extension on your contract if buying a home.
  • Pay off debt to qualify if you have the financial means.
  • Refinance another home or credit obligation, lowering your debt load.

More Tips & Tricks

If you are off to a slow start and file for an extension that pushes your filing date until October, fear not: a completed IRS extension form can be used to close on a mortgage transaction in lieu of the return.

To avoid certain problems, you can do your research ahead of time and consider working with an experienced mortgage lender who can help you avoid snags. You also will want to check your credit before applying for a mortgage, since a good credit score generally entitles you to the best rates and terms. You can do so by viewing your credit reports for free each year at AnnualCreditReport.com and checking your credit scores for free each month on Credit.com.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team