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Must They See Our Tax Return?

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Posted On: 10/21/2015

QUESTION:

We have an opportunity to get a mortgage with 20 percent down, however for reasons of privacy we would like to get a loan without providing our tax returns. Is this allowed?

ANSWER:

Most residential mortgages must now conform to what is called the “Ability-to-Repay” rule. Exceptions include home equity lines of credit, reverse mortgages, and short-term bridge loans.

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“Under the new Ability-to-Repay Rule,” says the Consumer Financial Protection Bureau, “mortgage lenders must look at customers’ income, assets, savings, and debt, and weigh those against the monthly payments over the long term – not just a teaser or introductory rate period. As long as they check the numbers and the numbers check out, lenders can offer any mortgage they reasonably believe a consumer can afford.”

Lenders need written evidence a borrower has the ability to repay the mortgage, but that evidence can take a number of forms. Tax returns will work for most borrowers, but lenders are not actually required to use returns to verify income. For instance, lenders can accept W-2s, payroll statements, government forms showing benefits and entitlements, receipts from a check cashing or funds transfer service, and records from a financial institution.

By looking at bank statements and average monthly balances lenders can get some sense of spending habits and income flows. Most lenders collect tax returns and bank statements.

The result is that by one estimate the typical loan application now includes some 500 pages of material, including such things as sale agreements, appraisals, appraisal reviews and borrower documents.

The reason for collecting as much paperwork as possible relates to liability. Your loan might be sold at some point after origination. The loan buyer – an investor – will only purchase the mortgage if the loan seller makes promises called representations and warranties assuring that the mortgage meets certain standards.

As it happens a lot of loans were originated and sold to investors without proper representations and warranties – one of the direct causes of the financial meltdown. As a result lenders paid out huge amounts to compensate investors, in addition to more than $140 billion to settle claims relating to mortgage-related rule violations.

Given this history, few lenders today want anything but the thickest possible loan files so that if a mortgage fails they can demonstrate that they took every possible step to verify the borrower’s ability to repay the debt – and avoid future liability.

This is not only a smart strategy for lenders, it’s also good for borrowers. Today, if you get a residential mortgage you can be very sure that all terms and conditions have been disclosed and that you really do have the ability to repay the debt.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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