Tax Returns and Home Purchase: What You Need to Know
Anyone who is planning on buying a home or getting refinanced for a property they already own should get ready for the ton of paperwork they have to take care of. Tax returns are, of course, an important part documentary requirement. But are they ALWAYS needed? NO.
W-2 wage earners are less likely to need to provide tax returns compared to self-employed individuals. Lenders require self-employed individuals to submit their tax returns because this is the only way they can determine your income. Tax returns, especially for self-employed workers, will show how much you took home versus your net income. In certain cases, all you need to present is a year's worth of tax returns. This commonly happens when you transition from being a full-time employe into a self-employed individual.
Automated Underwriting Findings
The standard requirement by mortgage lenders is for home buyers to submit tax returns for the past two years, plus two years of W-2s and pay stubs from the past 30 days. Automated underwriting is used in every mortgage in the U.S. that is sold on the secondary market. These software systems quickly process data to let lenders know the risk of a home buyer in terms of repaying a loan.
The automated underwriting findings might just determine the tax returns as unnecessary, especially if you are a W-2 wage earner. In such a case, you can close on a home without providing your tax return at all. Bear in mind, however, that certain factors may require you to submit two years' worth of tax returns despite your employee status. These are:
- Income from rental properties
- Income from Social Security
- Income from pension
- Schedule C income (earned apart from your W-2 job)
- Partnership in a business or another entity
The standard mix of required documentation when applying for a loan includes two years of tax returns, two years of W-2s, and the 30-day pay stub. However, times are changing fast and mortgage lenders are starting to require only what is needed. This makes things easier because there are lesser documents to review. Ultimately, automated underwriting will dictate what documentation is needed in order to for you to get a loan.
On the other hand, if you are going to obtain a loan from a bank, be prepared to provide additional documentation. Even if your loan customarily won't require you to submit tax returns, banking policies might require differently. Because banks often do business with Fannie Mae and Freddie Mac, it is especially investigative in analyzing risk. When transacting with banks, you have to provide the standard requirements just to make sure that you will be assessed corrrectly.
When looking for a mortgage lender to work with, value a provider that is practical in its financing approach. If you prioritize lenders based on their promises of low rates but are so afraid of risk that they will continuously demand more documentary requirements on your part, you might just end up getting tired of the paperwork without actually closing escrow.
To know more about tax returns and how they affect your loan application when buying a home, you can read the original Realtor post from which this article was based here.