Introduction to Tax Returns
For this blog update, we will be discussing the first time home buyer’s need to provide Tax Returns for the home loan. There are many different reasons why a first time home buyer will need to provide tax returns. These reasons can range from sourcing large deposits on a bank statement to comparing income from self-employment income.
Reasons Why A Tax Return May Be Requested
One of the primary reasons why a Tax Return may be requested for a first time home buyer is to source a large deposit. In this case, the underwriter will need a large deposit letter of explanation verifying that the deposit was in fact from the tax return. If there are any differences in the tax return, this would need to be further clarified. For example, if a first time home buyer uses a tax preparation service that charges for preparing his or her taxes, then the tax return amount may differ from the amount being deposited. In this case, the submission of the tax return, as well as the invoice for the tax preparation service that shows what the first time home buyer should be receiving. It is safe to assume that the underwriter will never make assumptions about sourcing large deposits into a bank account. The more documentation and better explanation a first time home buyer provides, the less of a chance that the underwriter will question it and ultimately add it as a condition for a conditional approval.
Another reason why a first time home buyer would need to provide tax returns for the loan process would be that the borrower has their own business, or is obtains a 1099. In these cases, the underwriter will need to verify the first time home buyer’s income and also make sure that the first time home buyer doesn’t owe taxes. If the first time home buyer owes taxes, the underwriter will also require proof that there is a payment plan in place, or that the taxes have been paid by the first time home buyer. When a first time home buyer also has Schedule C income, the underwriter will need to verify that this income matches the income that the borrower made that year. To do this, the first time home buyer will either need his or her 1099 forms, and/or profit and loss statements. The underwriter will compare these forms to see that they match. This is also something an underwriter will do if the borrower as W-2 Forms as well. This is usually how they’ll be able to tell if there is income missing, especially for the loan programs that require income to be under certain limits.
What If The Underwriter Needs The Tax Returns?
If the underwriter has asked the first time home buyer for the last two years of tax returns, this is not a cause for concern. The first time home buyer will only need to provide all pages of the tax return, as well as any additional schedules that were also filed along with the return. On the second page of the actual tax return labeled “1040,” all filers on the tax return, including the spouse if it was filed jointly, will need to sign and date in pen in the “Sign Here” section located near the bottom. This is to confirm to the underwriter that this information has been verified and is accurate to the best of the borrower’s knowledge.
For the next blog update, we will be talking more about the purchase contract, which is the legal contract that is the essentially the foundation of any mortgage loan!