What Items Do Mortgage Lenders Look for on Your Tax Return?

When you’re ready to apply for a mortgage loan, you can expect to submit a bunch of documentation. This is one of the biggest loans you’ll ever receive, and naturally, mortgage underwriters need to ensure your ability to repay it.

But while you might expect to show copies of your paystubs and W2s, you will probably need to provide copies of your tax returns from the previous two years also.

Since your paystubs and W2s provide salary information, providing extra documentation might seem redundant. However, tax returns provide need-to-know information about employment and salary, and they’re especially necessary if you’re self-employed.

Tax Returns and Employees

If you’re a “wage earning” employee who receives paystubs and W2s from your employer, be prepared to submit your latest copies of those documents and your tax returns to your mortgage lender. Please note that your underwriter will also review tax transcripts requested directly from the Internal Revenue Service to make sure the income on your documentation matches what’s found in the IRS database.

The reason for examining your tax documentation is simple: Underwriters need to confirm the information on your returns matches the information on your W2s. This is necessary because there’s always the chance of someone altering a W2 to qualify for a mortgage. We understand that the vast majority borrowers don’t go this far. Even so, lenders have to err on the side of caution and confirm the accuracy of your income statements.

If you receive income from other sources, such as retirement or rental property income, a review of your tax returns can also help confirm this income. From that point, underwriters decide whether you can use those other income sources for qualifying purposes and calculate how much you can spend on a property.

Tax Returns and Self-Employed Borrowers

Getting a mortgage as a self-employed borrower can be harder, but it is not by any means impossible. Because you may not have paystubs or W2s, your tax return is the primary means by which a lender can calculate your income, confirm other sources of income, and verify how long you’ve been in business.

As a self-employed borrower, you’re likely to write off certain business expenses (for supplies, insurance, equipment, etc.) to reduce your taxable income. These write offs can greatly lower the income reported on your tax documentation, and this can impact your ability to qualify for a mortgage.

Additionally, self-employment income tends to fluctuate from year to year. If your income has been consistent over the past two years, lenders may use the average of both years’ income for qualifying purposes. But if your income declines from one year to the next, lenders may use the lower number for qualifying purposes.

Get Started on Your Mortgage Today

When applying for a mortgage, it’s important to stay organized and provide supporting documentation as soon as possible. The sooner we receive your income information, the sooner we can start working on getting you pre-approved so that you can start your home search with confidence.

If you have any questions, the experts at Blue Spot Home Loans are happy to assist and find the right mortgage for your situation. Give us a call today or fill out a contact form to get started.