Tax returns and your loan approval!

Our friend Jay Vorhees at JVM Lending came up with another relatable blog recently: Tax Transcripts and 4506-T forms. It generally explains how those forms work, and reminded me of an experience of my own. First, a summary of Jay’s blog:

Every time a lender gets a loan from a borrower, they also have to get the last two years of tax returns. This is why borrowers sign IRS Form 4506-T as part of their disclosures. It formally authorizes lenders to request tax transcripts, which then show the filer’s status and income information.

Lenders are required to request transcripts from the IRS before a borrower can (borrowers can only request them directly if the IRS reject’s a lender’s request). If there is a minor error between the 4506-T and the tax return, this rejection may occur, so it happens pretty often.

That covers the basics of how the 4506-T form works and the role it plays in a real estate transaction. It’s a more subtle part of the process, but can cause huge headaches when done incorrectly. Take, for example, my experience with a property at Madeira in Pleasant Hill last year.

I represented the seller, and the buyer had their lender in Oakland, with a Bank out of L.A. Unbeknownst to us, the bank was being bought out and the new bank was called Bank of Hope – yes, really. But it turned out to be the Bank of Hopelessness.

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Processes changed, the lender in Oakland was let go and nobody knew what they were doing. Communication was terrible. One of the balls that got dropped was getting the tax returns. We closed almost two weeks late and the only way this ended up closing at all is by the processor who I had been speaking with regarding other issues. They actually went down to the IRS office and got the tax returns. She went beyond what is required (and probably got tired of our phone calls), but my seller is an attorney and also made multiple phone calls as they had already purchased a new home that was about to close.

This is one of the best reasons to get fully underwritten before you start to write offers. If all the documentation is in upfront, there won’t be any surprises or delays once you get into contract. Selecting the right lender can be the difference between smooth sailing and dark nightmares.

The Tax Benefits of Home Ownership

money in pocketMoney Management 101: Buying a home, especially in California, has its benefits from a tax perspective – buyers can deduct their mortgage interest and property taxes from their income after they purchase. For buyers in high tax brackets, these savings can amount to more than $1,000 per month in high-end markets.

Why is this benefit important? For payment-sensitive renters who are considering a first-time purchase and are nervous about their housing payment jumping from $2,500 in rent to $4,000 (for PITI = Principle, Interest, Taxes & Insurance), it may be enough to make them change their mind or scare them into being a renter for life.

What most people don’t realize or most lenders and realtors don’t emphasize (or bother pointing out at all), is that IRSbuyers can recognize their tax benefit right after purchasing by increasing their allowances or exemptions on their IRS W4 form and giving it to their HR contact. By increasing the number of exemptions – because now you own a home and can write off the interest – you don’t need to withhold as much money for the IRS. This allows the new home owner to maximize their take-home pay with each check and mitigate the pain that results from the increased home payment.

Buyers should consult with a CPA or tax planner to figure out their optimal number of exemptions. The idea is that on April 15th, you don’t pay any additional money or you don’t receive a refund from the IRS. If buyers are already claiming a handful of exemptions, then it is unlikely this benefit will give much in the form of extra income flowing into their paychecks.

Some information in this blog taken from JVM Lenders Daily Comments.