The home buying process is filled with many confusing terms and topics. Better understanding these main ideas will help you simplify the process and come in prepared. One term you may hear is “underwriter”. Essentially, the underwriter works for the mortgage lender, and they evaluate our financial status to determine if they will accept you for the loan.
But what exactly does an underwriter look for?
In this post, we will break down some of the most common questions about underwriting and what they look for. Read on to learn more.
What do underwriters look for on tax transcripts?
Tax returns are one important document that the underwriter will look for. So why are your tax returns important for mortgage underwriting? Your tax transcript are on a crucial document that is used to determine if the loan is affordable for you in the long run. Essentially, the underwriter is looking for confirmation about your income, including your different sources of income. They want to determine your monthly income, which is your loan-eligible income. To do this, the underwriters will look at:
- Income stability (consistency over 2 years)
- Debt-to-income ratio to assess how much mortgage you can pay each month without impeding your current monthly debt payments.
By reviewing your tax returns or tax transcripts, the underwriter is trying to determine your qualifying income. One-time money from a bonus or sale will not be considered as loan-eligible. Tax deductions will help decrease what you pay on taxes, but they won’t help you with the loan approval.
One way to help prepare your tax returns for an easier mortgage process is to file them earlier. Remember, the IRS can take several weeks to process your taxes, and you will have to wait on that information if your mortgage application requires tax transcripts from that year. File early for a smoother mortgage process, so you are not waiting for the IRS to process your taxes.
Business loans that require tax returns
Underwriters for business loans often look at tax returns as well. One of the most common types of business loans is a small business loan. For an SBA loan, you will need to provide income tax returns to most lenders. You should have three years of business and personal federal tax returns available for review. These tax returns should also include the principles and return in your business.
How many years of tax returns do we need for a mortgage?
If you are newly employed, as a recent college graduate or someone returning to the workforce, you may wonder how many years of tax returns you need for a mortgage. Typically, mortgage lenders require two years of federal income tax returns for securing a loan. You must demonstrate at least two years of sufficient assets with your tax returns.
Do all lenders require tax transcripts: Mortgage loan without tax returns
Typically, you will need two years of tax returns to qualify for a mortgage. So, it is possible to get a mortgage loan without tax returns? Even though you often need tax returns for two years, there are some mortgage options for people that cannot provide two years of tax returns or whose tax returns do not show enough money for a mortgage. There are mortgage lenders that do not require tax returns.
Some mortgage lenders offer loan programs that do not require tax returns, and these programs are most often used for self-employed people. Instead, they may ask for one or two years of bank statements. Every lender has different requirements, so you must inquire about no tax return mortgage options with different lenders. Typically, there are some requirements for mortgage loans without tax returns. Many times, a lender that does not require a tax return will require:
- Self-employment verification (or 1099)
- A certain down payment, typically of at least 10%
- Average monthly deposits over 12-24 months
- Compensating factors including other assets
Do underwriters check with the IRS?
Do mortgage companies verify tax returns? Yes, mortgage companies and underwriters verify your tax returns with the IRS. The lenders will request the tax transcript directly from the IRS to ensure that your application is not fraudulent. Since underwriters will check with the IRS, it is best that you provide accurate, verifiable information to ensure the greatest chance of securing the loan.
Every lender and underwriter is different and has different requirements. Make sure to ask the lender about the documentation they need and what they are looking for. If you are self-employed or cannot provide two years of tax returns, talk with the mortgage company about your options. Some mortgage lenders have alternative documents and may not require two years of tax transcripts. Affiliated Mortgage is a trusted mortgage broker in Rapid City, rated top amongst mortgage lenders Sioux Falls, SD and mortgage companies in Fargo.
If you still have questions about underwriters and the documents they review, we are happy to help. Contact one of the experts on our team today to learn more.
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