Insurers work for mortgage lenders to assess your financial status and determine if you qualify for a home loan or not. Perhaps most importantly, lenders use your tax returns to verify your income. Your tax documents provide lenders with information about your various types and sources of income and tell them how much you are eligible for your mortgage application. Non-recurring revenue, such as money received as a result of a one-time bonus from signing a company, a boat sale, or lottery winnings, is not usually counted as eligible income for a loan.
Lenders use the income stated on their returns to determine how much money they are willing to lend you, as well as to assess your ability to repay the loan. The most obvious aspect that lenders consider when reviewing tax returns is verifying income. Arguably, this is the most critical step in the subscription process. Your tax documentation will give lenders an overview of your monthly gross income for a given period of time.
If you are an employee of a company that receives pay stubs and W-2 forms from your employer, prepare tax returns for at least two years, as your mortgage lender will need recent copies. Mortgage insurers may want more information in situations where you are self-employed or if you are unable to demonstrate your income in a traditional way. In one situation I had, the lender believed that my client had falsified his loan application (including the tax return he filed with that application). Then, insurers will use the income information from your tax returns to determine if you qualify for a mortgage or not.
If you also have other sources of income, such as retirement income or rental properties, examining your tax returns will also help verify this income. So, every time you apply for a home loan, your lender will likely ask you to submit your income documentation, which may include recent pay stubs, W-2 forms, and one or two year tax returns. It will show information relevant to your insurer when it comes to demonstrating your income. However, while you can expect to show copies of your pay stubs and W2, you'll probably also need to file copies of your tax returns from the previous two years.
Whether you're employed, self-employed, or have an income of $1,099, you may need to provide copies of your tax returns. If you are a “salaried” employee receiving pay stubs and W2 forms from your employer, be prepared to submit your most recent copies of those documents and your tax returns to your mortgage lender. However, tax returns provide necessary information about employment and salary, and are especially necessary if you are self-employed. If you receive income from other sources, such as income from retirement or rental properties, reviewing your tax returns can also help confirm this income.
