The IRS 4506 is an IRS form used to request a copy of your tax transcripts from the IRS. Mortgage lenders now require a borrower to sign a 4506 to get a loan. It is an anti-fraud measure and data gathering step. And it can cause problems…
The problem is that a 4506 can take a long time for the IRS to process. Some lenders do not request the 4506 until a bank has issued a loan approval, usually a “conditional loan approval”. They see no reason to process a 4506 and snoop into people tax returns if the loan is not approved, so they have to wait. A conditional loan approval is one where the lender considers the loan approved, but there are still “conditions” the borrower must meet before settlement. One of the standard conditions is getting a 4506 done through the IRS. And this, as you can imagine with the U.S. government, can at times cause delays. If you get a loan approval 2 weeks prior to settlement, then there is plenty of time to get the 4506 process done. If you get loan approval done 1-2 days prior to your anticipated settlement date, don’t call the movers. Even when the 4506 is ordered early in the transaction, before loan approval, the IRS can delay things.
Any mortgage lender that works through FNMA, FHLMC, FHA or VA, and even the portfolio lenders who follow their own rules, all have to have a 4506 processed; it’s mandatory. So they are asking mortgage applicants to sign the IRS Form 4506, which is technically called a “Request for Copy or Transcript of Tax Form” as part of the mortgage application process. Once signed, you are giving them permission to retrieve copies of your tax returns, as far back as 2 years usually.
It is an antifraud measure because it double checks the tax documents that a mortgage applicant provides during the process, and ensure the documents from the IRS match what is on the documents provided by the borrower.
It is a data gathering tool because on loans for people who are salaried, there is only a requirement to submit copies of W2’s, not tax returns. So the underwriter processes the 4506 request to see if there is any information on the tax returns that causes a question or problem in the loan application, since this data would not be found in a W2 and would not be found on the loan application if the mortgage applicant withholds it or simply forgets to report it.
Have a side business that shows a loss every year?
Look out, that affects your debt ratios.
Own other properties you did not disclose because they are owned free & clear and you feel it is nobody’s business?
Look out, it’s the underwriter’s business, and they’ll find out. And they’ll count any taxes, insurance and possibly other expenses against your debt ratios.
Have unreimbursed business expenses on a salaried job that you claim as a tax write off?
They’ll be discovered and will count against you as a debt.
Have a second home and claim not to derive any rental income from it? And that the home is solely a 2nd home for your personal enjoyment?
The 4506 process will pull the tax returns to show if you do have income because the home is really a rental property!
There is nowhere to run, nowhere to hide!
I also talk about how there is nowhere to hide since underwriters know how to use Google. It’s especially entertaining. The bottom line is, although people still seem to try, it pays to tell all the truth about your financial picture when applying for a loan, it will get found out anyway!
Get a rate quote first. Then we can start talking about the application process, documentation, and the loan you might qualify for.