Self Employed? 2011 Tax Return? Home Loan? What Do These 3 Things Have in Common?

by John Ciolino on April 2, 2012

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Self Employed? 2011 Tax Return? Home Loan? What do these 3 things have in common and why is it so important?

It’s that time of the year when you are filing your 2011 tax return and wanting to buy a new home. What most people don’t know is that if not handled properly, you may need to wait a few months after filing the return before you can buy. Let me explain.

Photo courtesy of 401K’s Flickr

If you are self employed and your 2011 tax return shows more income than 2010, you may need to use the 2011 return to qualify for a home loan. Most people don’t realize that every lender uses a form called the 4506-T to validate your filing of the return. What is this exactly? The lender sends this form to the IRS to get a transcript of your tax return to confirm it is the same return you gave them. The history of the 4506-T goes back awhile because years ago, believe it or not, a lot of clients gave lenders tax returns that were fraudulent just to qualify for a home loan. Back then they didn’t use the 4506-T so they never verified the information. Then when the market turned and loans started to default, they would investigate it and find out the returns in their package were indeed fraudulent. Ouch!

Now it is near impossible to defraud a lender because of the use of this form. Why is this so important this time of year? The main reason is when you file your tax return with the IRS, even if it is electronically filed, it is taking them up to 8 weeks to validate it. Basically they receive it but by the time they enter the information into their database it could be 8 weeks. So if you go into escrow on a house that is a 30 day escrow and you just filed the return, and you need the 2011 income to qualify, you can be certain you won’t close on time.

This error happens every year even by the most seasoned loan officers. So how do you prevent this or what should you do? You first need to communicate with your loan officer and find out if the 2011 is needed to qualify. If it is then there may be options. First one if you HAVEN’T filed the return yet ask the loan officer if you can walk into the IRS in person and have the return stamped receipt by the IRS as proof of filing. This works with a handful of lenders. The second one is WAIT. Give it at least 60 days after you file your return before you put an offer on a house to be safe.

With any of these situations the key is to communicate upfront with your loan officer and see if there is a solution before you go into escrow. I am always available to answer any finance related questions at my office (310) 656-8201

Photo courtesy of 401K’s Flickr

John Ciolino is a loan officer at First Capital and an affiliated business partner at Partners Trust Real Estate. He can be reached at John.Ciolino@thepartnerstrust.com

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