If January 1 does not signal the new year, we know of another event that is just as certain to portend a change of the annual calendar . . . Postal delivery of our internal revenue form 1040. Almost with atomic clock precision the IRS lets us know that new year's eve revelry, football games and parades can be rained on. Fortunately, the U.S. Tax collecting system is voluntary. Today, it seems that everyone is talking about the internal revenue service. We have had senate hearings about IRS abuses, members of Congress planning for abolition, IRS restructuring plans put forth by the Clinton administration, IRS internal whistleblowers (sitting behind screens) telling us how the system works and yet we still got those forms produced under the paperwork reduction act.
Many home loan borrowers have had the opportunity to submit those 1040 forms to a lender when refinancing or purchasing of a home. For many people they become the benchmark for income verification and qualification. As an owner of income property, your tax returns will show rental income from the property, your mortgage payments, rental expenses and depreciation. As a self-employed borrower or business owner, your tax returns will show your gross income and expenses. Many a self-employed borrower is caught in the classic "catch 22" . . . If you show enough income to qualify for the loan, you pay self employment taxes that make you wonder why you want to be self employed in the first place. Conversely, you can take the deductions to which you are entitled and continue to rent since you cannot qualify to buy a home based on your net income. However, once we get beyond all this and submit our returns to the IRS, many of us think that will be the last we will see of them except during (heaven forbid) an audit. This may be the last time we see them, however it may not be the last time a lender sees them.
You may have noticed that within the stack of loan documents you sign, there are a few forms produced by the IRS. Lenders want to verify one thing as they disburse their funds . . . That they will get their money back "paid as agreed." with reason, to this end the IRS is very cooperative. Many methods have evolved over the years to verify that a borrower is relaying true and complete information. There is the initial process by which verifications are sent to employer, bank, current mortgage company and other creditors to verify the facts as stated on the application. Once these are ascertained, along with items such as appraisal and title information, a lender will fund a loan. However, not all is as clear cut as it may seem.
Within the loan documents and maybe even during the loan processing period, those irs forms appear. You, the borrower, by signing IRS form 4506 "request for copy or transcript of tax form" will allow an inquirer to obtain a copy of your tax return both for the current calendar year and possibly for three prior years. This form is used by many lenders to verify that the tax returns submitted to the lender are the same as the tax returns submitted to the IRS. There are times when they are not. Lenders tell me that they will not fund loans if the borrower refuses to sign form 4506. Many lenders employ a contract service that can retrieve tax information within 48 to 72 hours.
Even after a loan funds, lenders will do a random quality control check to verify that their internal systems are working. This "QC" audit will review and strengthen their internal controls and protect them against possible defaults. Payment defaults by borrowers during the first few months of the loan may cause investors to exercise their repurchase rights (lenders must buy back the loan from the investor) against lenders. Lenders do not want to take back non performing loans. Thus, they will protect themselves by all legal means. Lenders will also protect their financial interests and will not hesitate to file civil and/or criminal charges against fraudulent borrowers.
Copyright © 1999, jjrmf.com