Applying for a loan can be a long and confusing process, in which an applicant is asked to provide a significant amount of information.
It might feel as though the lender is asking for a lot, but this is done to prevent fraudulent applications from being approved. One document a lender is likely to require is a tax transcript.
Tax transcripts contain basic line information from a filed tax return. It essentially acts as supporting information, confirming the details already provided by the applicant.
This is needed by the underwriter to check the loan-eligible income of a borrower.
Not all lenders require tax transcripts, but the majority do. To learn more about what a tax transcript is, plus when and why an underwriter needs the information, read our guide.
Contents
What Are Tax Transcripts?
Tax transcripts are transcripts provided by the IRS providing information from a filed tax return. The IRS offers various tax transcripts, but most lenders tend to ask for the tax return transcript.
This contains most line items from a filed tax return. It should have all the relevant information needed by a mortgage lender. They are not copies of the processed tax return, and contain no changes made after the return was filed.
Do All Lenders Require Tax Transcripts?
Tax transcripts aren’t required by all lenders, but providing these forms is a fairly standard part of the approval process.
Some mortgage lenders might require two or more years of tax transcripts, while other lenders will be able to approve a loan without needing the additional documentation.
This is dependent on both the lender itself, and your own financial situation.
Tax transcripts are essentially offered as confirmation that the information you have provided is correct. Many lenders automatically ask for a tax transcript, regardless of your current situation.
Although the information on the transcript simply serves as a back-up, it ensures a lender won’t approve a loan based on fraudulent financial details.
So, not all lenders will need to see your tax transcripts, but be prepared to provide them anyway. All the transcript should do is act as confirmation of your financial situation.
Why Do Lenders Require Tax Transcripts?
Applying for a loan can feel like a long, drawn out, and very personal process. A lender insists on receiving a lot of information before they approve a loan, and you might feel as though you’re put under pressure.
However, often when your lender asks for tax transcripts, it’s simply to confirm the information you have already provided.
Tax transcripts are typically required by the underwriter. An underwriter works with the lender to check and evaluate loan applications.
This ensures that loans are offered only to those with the means to repay, and that loans aren’t approved based on fraudulent applications. And one way to verify this information is with a tax transcript.
Providing proof of income is an integral part of the mortgage application process. They may require to see your pay stubs and W-2 forms, in order to verify your current income.
This will include all sources of income. The underwriter will assess this information before approving your loan application.
However, some loan applicants will provide fraudulent information. In order to verify that an applicant has been honest, an underwriter needs to see additional documentation.
This is where the tax transcript comes in. Provided by the IRS, a tax transcript contains the necessary line information to support the details already provided.
If the tax transcript shows the applicant has sufficient qualifying income, then the loan should be approved.
If the tax transcript doesn’t match the information already provided by the applicant, then the underwriter will need to reassess. The lender will need an explanation from the applicant, and the loan might be denied.
An underwriter may request several years of tax transcripts, to confirm income stability and consistency. This might be necessary if the applicant receives income on commission, or via bonuses, rather than a single steady pay.
By acquiring transcripts from the past several years, the lender can see the consistent level of income.
How To Access Your Tax Transcript
To access your tax transcript, a taxpayer must complete Form 4506-T. This requests the tax transcript from the IRS, which can then be sent to an authorized third party.
The applicant will need to provide a name, social security number, and the address on the filed return. The applicant must also sign the form, or the request won’t be approved.
Form 4506-T is available online, or call the IRS directly to request a copy through the mail. The IRS will then send the transcript to the lender. It typically takes between 5 and 10 days for a request to be processed, and there is no charge.
Form 4506-T can be used to access the tax transcript for the most recent filing, and several years prior. An underwriter may need several years of tax transcripts to confirm a stable income.
The IRS does not release tax transcripts to third parties without permission of the taxpayer. A lender will often provide the applicant with Form 4506-T directly.
Although you are not obligated to access your tax return, without it the underwriter is unlikely to provide the loan.
Loans Without Tax Returns
Not all lenders require tax transcripts, and some will provide a loan without proof of tax returns. These loans are often offered to self-employed people, who may not have the desired tax transcripts.
Instead, they’ll be asked to provide bank statements and other proof of income. Although a lender may not require a tax transcript in this case, they will need supporting documentation confirming income, and other compensating factors.
Final Thoughts
Tax transcripts are required by most lenders. The transcripts primarily act as supporting information, confirming the details already provided by the applicant.
Tax transcripts are provided by the IRS to a third party with permission of the taxpayer, and show basic line information regarding a filed tax return.
Although some underwriters won’t request a transcript, the majority of lenders consider a supporting tax transcript to be a necessity.
