Home Buyers Should Pay Attention to IRS Form 4506-T

Not just a harmless part of the paper blizzard, it potentially exposes differently confidential personal financial information to unknown and uncontrollable numbers of people.
Reporting from Washington - You might guess it's just another boring-looking piece of the paper blitz you're hit with when you apply for a household loan. But given IRS Form 4506-T's new prominence in the fraud-shocked home loan market, it's much more than just another document to sign.
The precious authorizes a loan officer or home loan investor to acquire electronic transcripts from the Internal Revenue Service covering multiple years of your federal income tax filings. The IRS has supplied private tax return information to lenders for years, but the data typically were requested only at the close of escrow, and mainly for self-employed applicants or those with unusual earnings patterns.
But Fannie Mae recently directed lenders to obtain two sets of electronic transcripts for all borrowers, regardless of income sources -- a 4506-T upfront at application and another at closing. Fannie told lenders the move was part of its efforts to dapple fraudulent income claims and limit loan losses.
During the height of the housing boom, many lenders went soft on borrowers, allowing millions of them to "state" their incomes rather than supply copies of tax returns filed with the IRS. These so-called no-documentation loans frequently later turned out to be "liar loans," with puffed-up incomes enabling borrowers to obtain larger mortgages than they might justify -- or afford -- based on their genuine incomes.
When lenders didn't verify stated income claims, liar loans often turned into foreclosure bombs. Their remains are discernible in neighborhoods across the country, where foreclosures have soared to record levels.
Now, not only Fannie Mae however also most major lenders are tightening standards and double checking everything. When it comes to what you say is your annual income, they yearn to verify it twice -- even if you submitted stacks of IRS returns.
The IRS is helping out as well by lowering the cost of those multiple verifications. As a result of higher-than-expected revenues generated by skyrocketing claim for 4506-Ts, the IRS -- which is not permitted to dig out a profit on services such as income verification checks -- has decapitate the cost of transcripts from $4.50 to $2.25, according to industry sources.
"The timing of the cost drop couldn't be better for lenders looking to return to more prudent underwriting," said Curtis Knuth, vice president of New Jersey-based NCS Inc., one of the largest vendors of Form 4506-Ts to the mortgage industry. Most lenders, he said, do not charge loan applicants separately for earnings verifications but roll the costs into their origination or processing fees.
The much more intensive use of Form 4506-T also is focusing new light on what consumers should -- and shouldn't -- do when confronted with a lender's or settlement agent's request that they fill one out.
Here's a quick overview:
* Take Form 4506-T seriously. It's a powerful tool, and potentially exposes differently confidential personal financial information to unknown and uncontrollable numbers of people. It is not just another part of the paper blizzard.
* Pay careful focus to the IRS' instructions on the form, particularly as related to the tax return transcript years being requested, and to the dating of the form next to your signature. The date you write in is important because the IRS won't provide transcripts unless it receives the request within 60 days of the signing date by the taxpayers making the loan application. Make sure you date the precious when you sign it.
Filling in the tax return years is distressing as well because it allows you to delimit what the lender, settlement official or secondary market purchaser of the mortgage can obtain. The precious includes boxes allowing up to four years of tax data to be accessed, but loan applicants can specify that fewer years be available.
Earlier this decade, controversy erupted in the mortgage industry because some large secondary market loan investors and banks were requiring brokers or closing agents to instruct applicants to sign Form 4506-Ts but not date them or fill in the transcript years being requested. Some lenders even distributed their own printed instructions along with the Form 4506-T, requiring the home buyer's or refinancer's signature, but no dates. This not only countermanded the IRS' instructions however gave investors the ability to check incomes whenever they chose -- long after the closing.
Bottom line here: Be aware of the new stresses of Form 4506-T, and get used to seeing it duplicated during the home loan cycle. Make sure you know how it's supposed to be used -- and how it can be abused. Check it out in advance by going to the forms area at the IRS website www.irs.gov and downloading a copy.

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