Home Purchasers Should Learn About IRS Form 4506-T

Not just a harmless part of the paper blizzard, it potentially exposes otherwise confidential personal financial facts to unknown and uncontrollable numbers of people.

Reporting from Washington - You could guess it's just another boring-looking piece of the paper blitz you're hit with when you devote for a household loan. But given IRS Form 4506-T's new prominence in the fraud-shocked mortgage market, it's much more than just another document to sign.

The precious authorizes a loan officer or mortgage investor to acquire electronic transcripts from the Internal Revenue Service doormat multiple years of your federal earnings tax filings. The IRS has supplied private tax return facts to lenders for years, however the data typically were requested only at the close of escrow, and mainly for self-employed applicants or those with unusual income patterns.

But Fannie Mae recently directed lenders to obtain two sets of electronic transcripts for all borrowers, regardless of earnings sources -- a 4506-T upfront at application and another at closing. Fannie told lenders the condescend was part of its efforts to dapple fraudulent earnings claims and delimit loan losses.

During the height of the housing boom, many lenders went soft on borrowers, allowing millions of them to "state" their incomes rather than supply copies of tax returns filed with the IRS. These so-called no-documentation home loans often later turned out to be "liar loans," with puffed-up incomes enabling borrowers to obtain larger mortgages than they could justify -- or afford -- based on their genuine incomes.

When lenders didn't check stated earnings claims, liar loans frequently turned into foreclosure bombs. Their remains are discernible in neighborhoods across the country, where foreclosures have soared to record levels.

Now, not only Fannie Mae but also most major lenders are tightening standards and double checking everything. When it comes to what you say is your annual income, they yearn to verify it twice -- even if you submitted stacks of IRS returns.

The IRS is helping out as well by lowering the price of those multiple verifications. As a result of higher-than-expected revenues generated by skyrocketing claim for 4506-Ts, the IRS -- which is not permitted to dig out a profit on services such as earnings verification checks -- has cut the price of transcripts from $4.50 to $2.25, according to industry sources.

"The timing of the cost reduction couldn't be better for lenders looking to return to more frugal underwriting," said Curtis Knuth, vice president of New Jersey-based NCS Inc., one of the largest vendors of Form 4506-Ts to the mortgage industry. Most lenders, he said, do not charge loan applicants separately for income verifications but roll the costs into their origination or processing fees.

The much more intensive use of Form 4506-T also is focusing new light on what consumers should -- and shouldn't -- do when confronted with a lender's or settlement agent's request that they fill one out.

Here's a quick overview:

Take Form 4506-T seriously. It's a powerful tool, and potentially exposes otherwise confidential personal lending information to unknown and uncontrollable numbers of people. It is not just another part of the paper blizzard.

Pay careful attention to the IRS' instructions on the form, particularly as related to the tax return transcript years being requested, and to the dating of the precious next to your signature. The date you write in is important because the IRS won't provide transcripts unless it receives the request within 60 days of the signing date by the taxpayers making the home loan application. Make sure you date the precious when you sign it.

Filling in the tax return years is crucial as well because it allows you to limit what the lender, settlement official or secondary market purchaser of the home loan can obtain. The form includes boxes allowing up to four years of tax data to be accessed, but loan applicants can specify that fewer years be available.

Earlier this decade, discussion erupted in the mortgage industry because some large secondary market loan investors and banks were requiring brokers or closing agents to instruct applicants to sign Form 4506-Ts but not date them or fill in the transcript years being requested. Some lenders even distributed their own printed instructions along with the Form 4506-T, requiring the home buyer's or refinancer's signature, however no dates. This not only countermanded the IRS' instructions however gave investors the deftness to check incomes whenever they chose -- long after the closing.

Bottom line here: Make sure you understand the new importance of Form 4506-T, and get used to seeing it duplicated while performing the mortgage cycle. Make sure you know how it's supposed to be derived -- and how it can be abused. Check it out in advance by going to the forms area at the IRS website www.irs.gov and downloading a copy.