You want a home loan but really aren’t sure about supplying your tax returns for approval purposes. Whether it’s because you show a loss as a business owner or you have unreimbursed employee expenses, it’s normal to worry about showing your adjusted gross income.
Lucky for you, not all loan programs require you to provide your tax documents. It depends on your type of employment as well as the chosen loan program. Only a select few actually require you to provide two years of your tax documents for approval purposes.
The Self-Employed May Need Two Years of Tax Returns
The most common borrowers that require two years of tax returns are the self-employed. There are two reasons for this:
- You don’t receive income from anyone but yourself
- Your income probably isn’t consistent
Using your adjusted gross income, lenders can determine how much money you actually make. When you work for someone else and get paid a salary, the employer provides you with a paycheck that contains a paystub. That paystub shows your gross income and your deductions. You don’t have that if you are self-employed. Plus, there are many more deductions you can take as a self-employed borrower than you could if you worked for someone else.
The fact that your income is likely inconsistent also plays a role. Lenders use the average of your adjusted gross income over two years to determine your ability to afford a loan. If they just took your word for your income, they could give you a loan that you can’t afford, which could lead to another housing crisis.
The Employed Don’t Need Tax Returns
Typically, if you work for someone else on a salaried or hourly basis, you don’t have to supply your tax returns. Lenders can tell your gross income from your paystubs and W-2s. Typically, you have to provide W-2s from the last two years. Lenders will go through a similar process as they would for the self-employed. They take an average of your income and make sure your income is steadily increasing, rather than decreasing over the years.
Streamline Mortgage Programs Don’t Require Tax Documents
Aside from your type of employment, your chosen loan program may not require you to provide tax documents. This doesn’t include purchase loans – all purchase loans require income documentation. All lenders, no matter the program, must follow the Ability to Repay Rule. This means the lender adequately determined that you could afford the loan they give you by verifying your income. How they verify your income is up to lender discretion, but it must be verified beyond a reasonable doubt.
Streamline refinance loans, on the other hand, may not require you to provide any income documentation. The FHA and the VA both provide a streamline refinance option. The loan program is meant to help borrowers refinance into a lower interest rate, lower payment, or better term. The lender is required to determine your likelihood to make your mortgage payments by looking at your mortgage payment history. As long as you made your mortgage payments on time for the last 12 months, you may be able to get away without verifying your income, credit score, or home value.
Subprime Loans May Not Require Tax Returns
Subprime loans, otherwise known as alternative documentation loans today, may not require tax returns either. This is often the reason borrowers turn to subprime choices. Subprime lenders keep the loans on their own portfolio. This means they decide the requirements because they don’t have to answer to any investors.
If the lender so chooses, they don’t have to use your tax returns to verify your income. They can use an alternative form of documentation, such as your bank statements. Many borrowers prefer this method because bank statements don’t show the deductions you take on your taxes. Instead, it shows the money you bring in on a regular basis. Some lenders will use this income and ignore the deductions you take on your tax returns for specific expenses.
As you can see, whether you need two years of tax returns or not is a matter of opinion and the type of loan you want. A self-employed borrower buying a home will likely need to provide tax documents if he chooses a conventional or government-backed loan. But, if he decided to pursue a subprime loan, he may get away without having to prove his tax documents.
Choose your loan program based on your qualifications and what you can prove to the lender. Any borrower that goes ‘mainstream’ and chooses a conventional or government-backed loan should be prepared to provide two years of tax returns in most cases, though.