What’s a Form 4506-T and why does my lender require it?

In this article:

• As part of mortgage reforms, lenders must verify the borrower’s ability to repay the loan
• To avoid running afoul of this government requirement, most lenders audit the income information and documents supplied by the borrower
• The IRS Form 4506-T gives your permission to the lender to verify your income with the IRS

What is a Form 4506-T?

A form 4506-T simply allows your lender to verify with the IRS that the forms you supply to prove your income match those in the possession of the IRS. The 4506-T form says:

“The IRS can provide a transcript that includes data from these information returns. State or local information is not included with the Form W-2 information.

The IRS may be able to provide this transcript information for up to 10 years. Information for the current year is generally not available until the year after it is filed with the IRS.”

Does everyone have to sign a 4506-T?

The short answer is “no.” Because only information from the previous year is available, and that’s not usually a factor for W-2 employees, most folks with “regular jobs” won’t have to sign one. The lender may call your current employer to verify your income instead. Or lenders can just send a VOE (verification of Employment form) to your employer.

However, self-employed borrowers have to demonstrate several years of successful business and sufficient income to get mortgage approval. Mortgage lenders want to make sure that their income is trending higher, or at least not heading lower over time.

Related: Self-employed mortgage borrower? Here are the rules

And it’s pretty easy to create a phone tax return, so naturally, mortgage lenders want to make sure that the income you report to them is the same income you reported to the IRS.

For VA home loans, you don’t need a 4506-T, either. Even for self-employed borrowers. However, automated underwriting systems (AUS) may still list the form as a requirement to close your loan. And VA lenders are allowed to impose this requirement.

If you don’t want to sign a 4506-T, find a VA lender that doesn’t require it.

Why should you care if a 4506-T is required?

As long as the information and documents you supply your lender match those of the IRS, why should you fear the 4506-T?

Financial privacy, according to a recent Washington Post article. “Federal auditors say the popular ‘tax transcript’ program run by the Internal Revenue Service and used by millions of mortgage applicants a year lacks adequate security protections against disclosures of tax-return details to people who shouldn’t be allowed to obtain them,” reported the Post.

In most cases, fraud occurred when unauthorized requests were granted to criminals who obtained the victim’s private information illegally. Not by mortgage lenders or their employees.

To protect yourself, then, put your lender’s name on line 5 of the form, which identifies the third party that will obtain the transcript. In addition, specify the tax years that you agree to allow them to verify.