Income Validation: The Importance of the 4506-T Form
Requesting information from the IRS can seem like a hassle, but it’s a necessary task if you want to have a loan supported by Fannie Mae.
Working with your lender, you can easily complete the right forms and receive all the required documents, allowing you to qualify for an affordable mortgage on a wonderful home!
Borrower Income Validation: Requesting Tax Information from the IRS
Options for Validating Income
Validating your income is an important part of the mortgage-lending process. Lenders, as well as the government organizations that support mortgages, will want to know how much you earn, which will factor into how much you can borrow.
There are many options available for verifying your income, but some, such as regular wages, are more common than others, such as rental income. If you earn basic wages or a salary, you can use pay stubs, earning statements, or even W2 forms to show the amount that you earned in a given year. You could also use third-party verification, such as a signed letter from your employer stating the amount you earn.
If you earn an income based on tips, you can use 1040/1040A statements that show the amount you earned in a pervious year, and if you receive welfare or Social Security support, you can use a copy of your check that was issued by the government agency.
In many circumstances, the lender will request past tax information from the IRS verify these numbers. In order to receive the documents, you’ll need to work together to complete the 4506-T form.
What is the 4506-T Form?
The Internal Revenue Service holds a wide variety of information on taxpayers, and this information could be used in scams and identity-theft schemes. Therefore, the IRS is very protective with this private information, making every effort to only release documents to the right people at the right times.
So what happens if you need income-verification forms from the IRS? Unfortunately, you can’t just call them up and request the information. Instead, you have to use a 4506-T form, the document that is used to retrieve past information. This document will need to be completed and signed, and when it’s complete, you can grant another party, such as a lender, permission to access your data. With this document, you can request tax information, allowing lenders to verify your income.
Use of IRS Form 4506-T
If you are using a loan that will be supported by Fannie Mae, you will be required to complete and sign a form called the 4506-T. This form will need to be completed at or before the closing of your loan. Depending on the situation, it may be necessary to complete multiple 4506-T forms. When you complete this form, you’ll be able to obtain tax information going back four years, but only one tax form number can be requested for each request form.
In addition to the 4506-T forms, your lender will also have to document the requirements to receive your income tax transcripts by submitting the forms to the IRS, which can be done directly or through an authorized designee. This will be done during the lender’s quality control plan. If you want to learn more about the quality control plan used by lenders, see the Selling Guide provided by Fannie Mae.
Assuming the lender has submitted the 4506-T form to the IRS before closing, the transcript will be used to validate the income documentation that you provide to the lender. In other words, the forms provided by the IRS will be used to support and verify the income that you are claiming. If your lender has already received the tax transcript, an additional signed IRS 4506-T is not required.
If all of your information is already validated by the lender through other methods, your lender will not be required to obtain the 4506-T form.
IRS Forms for Obtaining Income-Tax Information
With the 4506-T form, which grants access to your information, lenders can now access specific documents that will verify and validate your income. For example, the lender can now look at 1040, 1040A, 1040Z, or W2 documents. In certain situations, however, copies of the actual returns or forms are needed because the tax transcripts may not provide enough information.
If your income comes from self-employment and it has been validated through other means, the lender will not need your tax returns. This information may be provided to the lender through 1040, Schedule C, C-EZ.
Alternatives to the 4506-T
While the 4506-T is the most effective and efficient way to obtain information from the IRS, it is possible for lenders to use other methods to acquire the necessary information. The IRS Request for Copy of Tax Return (4506) is also acceptable, as is the IRS Tax Information Authorization (4506T-EZ), although the “EZ” form can only be used to obtain 1040 information.
How to Submit the IRS Authorization Form
Working with your lender, you will need to complete the form as thoroughly and accurately as possible. The lender will need to fill in their information as the recipient of the tax documents; they will either include their name or, if the servicing will be transferred in 120 days, the name of the servicer. The lender will also indicate that the information request is for income verification related to the years that will be used to qualify the borrower.
Once completed, the 4506-T form is valid for 120 days.
Lenders Will Keep the Tax Documents
When the lender obtains your information, he or she will need to keep them on file. All tax documents, including the 4506-T form and the information received, will need to be kept so they can be reviewed for quality control at a later date.
Assisting You with IRS Form Requests and Mortgage Qualification
Want more information on completing the 4506-T form? Want help getting qualified for an affordable mortgage on a world-class home? Then contact San Diego Purchase Loans and we’ll put our experience and dedication to work for you!