Getting Qualified with IRS Transcripts
For any loan to get approved, a client must provide proof that they can satisfy the loan repayment through their income. Lenders use a ratio called Debt to Income (DTI) to verify that ability. Having a good DTI is one of the most important factors and can often fluctuate. Borrowers can prove their income with the W2 that they get from their employer every year. When employers are just starting to distribute W2s, lenders will often ask for the previous year’s W2 instead.
However, what if as a borrower you are making more income than the previous year? You could use that new income to lower their DTI and qualify for a loan to consolidate more debts, to make improvements around the house, or just have some extra capital as a cushion. To leverage this additional income, you would not only need to provide your W2, but you’d also need to file taxes and provide the lender with the transcript from the IRS to have an extra verification of the new income.
The additional requirement could come as a surprise to many and increase lead time. Depending on when you file, it could be several weeks before you get your return or receive your IRS transcript. Not great news if you had a closing date in mind and this was not accounted for. As the filing deadline passes, lenders will require the current tax returns. That is why it is wise to file your tax returns well before you apply for a mortgage loan, especially if your income has fluctuated.
As we all know, we are at the mercy of the IRS after we submit our taxes. The time from when you submit, and when you get your return, can vary depending on when you submitted and how you submitted your taxes. In some cases, a borrower can call the IRS to have their transcripts sent to them but depending on when they filed, it could be a waiting game if they are not yet complete. If they are not available, the whole loan process comes to a halt.
If a borrower is self-employed (Schedule-C) a lender would need to see your current tax returns to see their earnings and confirm your income. If the income was much lower, then a lender would use the most recent tax returns. Anyone who has a sole proprietorship business should speak with an expert Loan Advisor because there are many other considerations that need to be accounted for.
Much of the mortgage loan process is about gaining the knowledge, working with an expert Loan Advisor, and being prepared. This time of year can add complications to the loan process if you are making more and want to use that extra income in consideration for you loan, or if you have your own business with fluctuating earnings. Overall, having good knowledge of your finances, working with an expert Loan Advisor, and being well prepared with tax information will help you bypass the waiting game with the IRS.
Written by: Amanda Dailey, Underwriting Team Lead at Royal United Mortgage LLC