As part of the home loan application process for FHA insured mortgages, applicants are required to furnish a set of paperwork that includes tax documents. According to the FHA loan rulebook, HUD 4155.1, in a section titled “Federal Income Tax Returns”, the rules tell the lender to get the applicant’s:
• federal income tax returns for the most recent two years, both individual and business, including all applicable schedules, for self-employed borrowers,
• individual federal tax returns for commissioned individuals. ”
The phrase “all applicable schedules” refers to things like Schedule C and other forms required. If you don’t know what Schedule C is, you likely have not needed to file one. (It’s for borrowers who report business income or self-employment income.
FHA loan rules also state that the lender “must obtain signed forms IRS 4506, IRS 8821, Tax Information Authorization, or whatever form or electronic retrieval service is appropriate
for obtaining tax returns directly from the IRS for any loan that requires the borrower’s tax returns.”
In this section, HUD 4155.1 also instructs the lender that a borrower’s business tax returns, where applicable, may not be needed “if” the borrower meets “all the following conditions” which include:
• individual federal income tax returns show increasing self-employed income over the past two years
• business accounts are not the source of funds to close, and
• the FHA-insured mortgage transaction is not a cash out refinance.
When submitting tax information to the lender, accuracy is very important. FHA rules advise, “If the lender obtains tax transcripts directly from the IRS or an electronic retrieval service, the loan approval must be based on the transcript data. Any discrepancies between the transcripts and the borrower provided tax returns must be resolved prior to loan approval.”
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