Written By: Bonnie Wilt-Hild
As I am sure everyone is aware, just about every lender out there is utilizing 3rd party tax transcripts for all mortgage transactions. When we began to utilize the service there were generally limited to self employed borrowers, however, over the past year or two most lenders have determined that they were a very useful tool when trying to detect income fraud. I personally have found them to be a useful tool in many other ways as well.
Needless to say, confirming a borrower’s income and determining that prior year income documentation such as W-2 wage statements is valid would be a primary reason for utilizing this information but there is also a wealth of information that can be determined by the transcripts as well. Very recently I have seen several tax transcripts that are indicating that the borrower is claiming self employment income in addition to their W-2 income and in many cases they are writing off losses. One particular case comes to mind wherein the borrower was actually partner to a sizable corporation, which was of course writing off pretty substantial losses. When questioned the borrower implied that his interest in the business had been sold and when asked for the documentation, was unable to provide it. He then went on to say that he was unaware (haha) that he still owned an interest in the corporation. As you can imagine the borrower’s ratios were quite excessive carrying the loss from the business that he didn’t know he owned and the case ended up rejected.
Another great discover on tax transcripts is things like alimony. It actually is tax deductable and if a borrower is paying it, you can be sure they will claim it. Additionally, it's nice to know what a borrower's tax liability is from previous years. If a borrower has no real savings pattern or assets, which can be verified, and the tax transcripts are indicating that there is significant tax liability from previous tax years, I will generally condition for evidence that the outstanding tax liability has been paid in full and if not request documentation pertaining to the actual monthly tax liability if a payment plan has been set up with the IRS. Needless to say, if the payment to the IRS is somewhat sizable, it’s very possible that it may impede your borrower’s ability to repay your debt short of defaulting on the payment plan with the IRS, which could result in federal tax liens and/or wage garnishment which again will impede their ability to make the monthly payment on the proposed mortgage.
There are several other pieces of valuable information that the transcripts provide which include informing as to if SS income is taxable or not, this goes along way if your borrower needs this income grossed up in order to qualify. The transcripts will also indicate if a Schedule E has been filed indicating if or not the borrower owns other properties which they failed to disclose. You could also determine if the borrower has taken any IRA distributions within the most recent two tax years which could indicate financial mismanagement on the borrowers part of obligations beyond that which the borrower can manage on their regular monthly salary.
So as you can see, never waive the tax transcripts and if possible obtain them on all case files. Like I said a wealth of information which really could affect your ultimate loan decision can be found and verified using this information. As always, happy underwriting.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org.