Q: My lender already has proof of my income. I have given them my W-2 forms, my pay stubs, and the information to contact my employer directly. This is three verifications of my income! Now the underwriter is asking for the last two years of my income tax returns also. I feel this is unnecessary, redundant, and invasive. Do I really have to give them my tax returns? Thanks, Sheila
A: If this was 2006, no lender would be asking for your tax returns (unless you are self-employed and have no W-2s). But now in 2012, tax returns are required for all mortgage loans backed by Fannie Mae or Freddie Mac. No exceptions. Here’s why.
Your tax returns might tell a completely different story about your income than your W-2 and pay stubs. By not digging deeper into this story, too many lenders suffered financial losses from defaulted loans when the borrowers could not complete their loan payments.
Here is a real life example. A woman had a good income from her employer, but she also had a business on the side, a website that sold items for dogs. She loved dogs and all things related to dogs, so she traveled all over the U.S. finding and collecting unique dog dishes, blankets, toys, clothes, decorations, and all manner of doggy gear. She spent more money on travel and acquisitions than she made selling on her website, resulting in a large loss. So even though her W-2 showed a good income, her actual income (after subtracting her personal business loss) was insufficient to qualify for the loan she wanted.
With today’s lending guidelines, no tax returns means no loan. Therefore, it’s best to provide tax returns right up front, along with your other income and asset documentation.