What is the 4506-T Form?

by Mortgage Nerd on October 29, 2011 · 0 comments

In a nutshell the 4506-T form is an IRS form that your mortgage lender uses to retrieve a transcript of your tax returns. They use this transcript to match the #’s against the W2’s, 1099’s, and 1040’s (tax returns) that you submit to your loan officer. It serves as a validation tool for mortgage underwriters to make sure that your tax returns are legitimate, and is a requirement for most loan files.

4506-T came about because of mortgage fraud

A few years ago the 4506-T was used solely as an auditing tool for lenders and was executed on maybe 1 in 20 files. Lenders started realizing that way too many people had two sets of tax returns; One set for the IRS that was drawn up to pay fewer taxes, and another set for the lender which showed more income, allowing them to buy more house. Dishonest bastards I know! Now honest people can be hurt by this 4506-T form. I’m gonna tell you how!

An example of how the 4506-T form killed a file

I recently had a borrower that was receiving a pension from Puerto Rico and thus she filed tax returns in Puerto Rico. Obviously her 4506-T results didn’t show any income from a US tax return. Even though she had pay stubs, W2-PR’s (Puerto Rico W2’s), and her bank statements showed the direct deposit from the pension, we weren’t able to use this income because it didn’t show up on the 4506-T. Puerto Rico does have a form that is similar to the 4506-T but my borrower didn’t want to wait for the 4 to 6 months that we were told it would take.

4506-T Waiver

There is a waiver that can be executed by some lenders so that Fannie Mae or Freddie Mac will purchase a loan without a 4506-T. For example, if you have “non-taxable income” such as social security benefits and you don’t file a tax return than this would be a good reason to get a 4506-T waiver. Also, if you were late filing your tax returns and the 4506-T didn’t show any income for this reason, you may be able to get a 4506-T waiver if you can prove that you filed an extension on time and also if your file has some strong compensating factors, such as good credit and strong employment history.

Conclusion

I have mentioned before that getting approved for a mortgage these days really has nothing to do with you being able to afford the mortgage payments. It’s really more about being able to provide the proper documentation that Fannie Mae and Freddie Mac require. For this reason, “common sense” lending is dead. The more you understand this fact the better experience you will have with the mortgage application process.

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