The IRS Form 4506T is a little known form mortgage lenders use to catch applicants in income fibs. In the good old days, the form was used only for those No Doc or No Income Verification mortgages. There were some lenders that did not even use the form and some that only made the applicant sign it at closing, when it was too late.  Now everybody signs one, at the time of application, whether you are self employed or a school teacher. So, before you forget to tell the lender something small or tell them something big, think again. Big Brother is watching!

Here are five things the 4506T will reveal to the lender about your finances:

1.    You have a side gig and take big deductions on your Schedule C: Nowadays, people need to make a little extra money. So teachers, dentists or other well salaried individuals may be moonlighting as a computer consultant or house painter. Self employment brings the hope of extra income, but often brings on extra expenses. These expenses are listed in the Schedule C on the tax returns. If the applicant fails to mention to the loan officer that they have this side gig and lists every write off possible for the business, the Schedule C produces this number in the 4506T. The lender will ask for a full copy of the tax return and deduct the loss against the salaried income.  This loss might prove too high and the loan will be rejected.

2.    You have kids and pay child support: Child support is considered an expense. The IRS allows a tax credit for each child. This is over and above exemptions for dependants as well as child support payments. All revealed in the 4506T. If you do not state the number of dependents on your loan application and take credits for them, it will show up in the 4506T. More importantly, if you take a deduction for child support payments, and do not reveal it, the lender will discover these only after they pull the 4506T and then request a copy of the divorce agreement, full tax returns and recalculate your expenses adding in the child support payments. This inevitably opens up a can worms and can be a real deal killer at the very last minute. So, bottom line is you can’t hide your kids!

3.    You were married and have to pay alimony Alimony/maintenance payments are sometimes allowed as a deduction to the one paying them. It depends on the divorce agreement and if they will be included as taxable income for the one receiving them.  Even if the applicant does not state on the mortgage application that they pay alimony, and take a deduction on the returns, the 4506T will reveal this. The lender will then want to see the divorce agreement, know how long the payments are required for and add them into the expense ratio of the applicant. This monthly expense, added to cars, credit cards and student loans might disqualify the applicant from the loan.

4.    You take big losses on your rental property When a mortgage applicant owns investment properties; they are permitted to include the rental income as ordinary income on the loan application. The lender would ask for a copy of the leases as proof the rent was true. Now, when rental income is used, the bank will automatically request a copy of the federal tax returns to review the Schedule E. The net income is the number used, less depreciation and interest. However, if the applicant does not use the rental income on their loan application, but still takes a loss on the property, the 4506T will reveal the loss and the lender will net it out of the salary. Again, this loss will be deducted from the gross income on the loan application and the expense ratios might not work.

5.    You lied about your income on your loan application I know, this is a catch all, but people do fib about how much money they make!  The 4506T will need to match the exact income stated on the loan application with that submitted to the IRS. If the gross salary, overtime, bonuses, commission or unreimbursed business expenses does not match, the lender will require the last two years taxes returns to match it up. This takes extra time, requires more documentation and overall pisses off the underwriter.

So, think about these little things before you complete your loan application and tell the mortgage loan officer right away. The problem with the 4506T is that the mortgage lender uses this form to request the tax returns at the end of the loan process, sometimes a few days before the closing. If something is discovered at that end, they will request more forms, take more time and perhaps reject your mortgage request after you scheduled the moving truck!  Think again.