By Julian Hebron

 

Rates are bouncing around near record lows set last October and consumers are looking to seize the opportunity. There’s always a rush by consumers and loan agents to lock rates on dips, and that practice is all the more prevalent when extreme daily rate swings raise the sense of urgency.

 

But before you take the ready-fire-aim approach, remember the old saying: haste makes waste. Just because a rate is locked doesn’t mean the loan will close. Here’s how you can make sure that it does.

 

Let Lender Run Your Credit Score: Credit bureau scoring models know people shop for mortgages, so more than one mortgage-related credit run in a 30 day window won’t reduce your score. Many critical loan approval factors are built into a credit report, so a lender should run your credit before the rate lock—even if you’ve worked with that lender before. Your rate is predicated on the credit score, and scores fluctuate daily as you use credit cards. Credit reports also show current balances on housing and all other debt, and these balances can impact qualifying. Credit reports also show any derogatory items on your credit history, including recent creditor mistakes you may not know about—these are common, and you’re guilty of creditor mistakes until you prove you’re innocent. Most lenders can help here, but it takes time so running credit should be first in the process.

 

Tell Lender About Job, Income, Asset Changes: If you’re working with a lender for the first time, of course you must provide a full financial profile along with paystubs, tax returns and bank statements to back it up. But if you’re working with a lender you’ve already worked with, never assume the documentation process is any different. Tell them everything when you talk about rates. Have you changed jobs or titles? Did you not get your bonus this year? Or was it bigger? Did you spend all your savings on a vacation or new car? Or will you in the next 60 days? All banks approve loans based on your debt-to-income ratio, and these factors all go into the calculation. The debt comes from the credit report and tax returns, and the income comes from paystubs, tax returns and bank statements.

 

Provide All Documentation Immediately: Provide this documentation right away even if a busy loan agent doesn’t ask for it right away. The only exception to this rule is if the loan agent explicitly tells you they’re doing a special refinance that doesn’t require documentation because of some certain bank or government program.

 

Your Property Must Qualify: It’s not enough for your credit score and debt-to-income ratio to qualify you. The property must also qualify. First, there must be enough equity in your home. Due to appraisal rules that prevent loan agents from pre-screening home values with appraisers, you usually have to pay for an appraisal up front to find out if you have sufficient equity. Second, the lender may require any big deferred maintenance issues like rotting wood, chipping paint, water damage or signs of water damage to be fixed before the loan closes—this is another timing issue that affects rate locks, so tell your lender if you have maintenance issues. And if you’re in a condo, the condo building must have at least 51% owner-occupancy, a healthy budget with no (or at least well-explained and documented) special assessments, no litigation, no single owner holding more than 10% of units, and no more than 20% commercial space (or 25% for FHA).

 

Don’t Forget Your Second Mortgage!: If you have a second mortgage, the second mortgage holder must agree to ‘subordinate’ behind a new first mortgage before the new mortgage can close. Whether or not the second mortgage is with the lender handling the refi, this subortination review and approval adds time to the process, sometimes weeks. As such, see ‘Is Your Rate Locked For Long Enough’ below. And zero-balance Home Equity Lines of Credit (HELOCs) follow these same rules. Even if there’s a zero balance, the HELOC holder must approve the subordination.

 

Incorrect Loan Balances Blow Rate Locks:  Setting your refi loan amount is related to credit reports and the ‘Cost Or No-Cost Refinance’ section below. Your credit report will show your existing loan balance, and if you choose a refi with closing costs, you need to choose whether you’re paying cash or adding costs to the new loan. If loan agents are locking rates too quickly, here are a couple ways it can blow up the process: (1) they forget to account for existing loan payments you just made or will make during the refi process, then they find out when you’re signing final papers and you have to restart—which can blow your rate lock, or (2) they assume your property will appraise for a certain amount and if your value comes in low, they have to redo the loan amount—which can cause you to have a higher rate or fees, or you might have to pay your loan down in order to qualify.

 

Cost or No-Cost Refinance?: If you think rates will drop more, it’s best to do a no-cost refinance so that you can refinance again later without having fees wash out the lower-rate benefit. If you think rates are as low as they can go, it’s best to do a refinance with normal fees ($2500-4500 depending on your market) and perhaps ‘buy your rate down’ by paying tax deductible points (a ‘point’ is 1% of your loan amount). On a no-cost transaction, lenders offset your closing costs by offering a slightly higher rate, usually .125% to .25% higher.

 

What Is The Rate Outlook?: The U.S. and global economies are in uncharted territory given mass post-crisis government stimulus spending, so even the best market oracles don’t know how rates will play. But here’s what we do know: rates drop when mortgage backed securities (MBS) rise, and MBS are at all-time highs because they’re one of the best safe havens for global investors rattled by market uncertainty. This is why rates are at record lows. MBS are priced for a very weak economic outlook. Any signs of improvement will cause MBS to sell and rates to rise.

 

Getting Rate Quotes: Even the best rate websites like MortgageNewsDaily aren’t a substitute for a rate quote. As noted in the ‘Cost or No-Cost’ section, there’s a direct relationship between rates and fees, so a rate quote will depend on your objectives and it can only be provided to you by a lender. Always insist on a full written term sheet displaying the rate, term (e.g., 30yr fixed), every single line item closing cost, total monthly costs including insurance and taxes, and total cash-to-close or cash-in-hand at closing. Lenders are required by Federal law to give you a three-page Good Faith Estimate but this form is a joke because it doesn’t show you all of your line items, nor your total monthly cost, nor your cash-to-close. So make sure your lender shows this to you in some written format before you lock a rate.

 

Is Your Rate Locked For Long Enough?: Banks are busy during these rate dips and quoted rates can only be locked for a certain number of days. Ask your loan agent when they expect to close your loan, and if their quoted rate lock is enough time to get the deal done. Also refer back to the ‘Provide All Documentation Immediately’ section above, so you can hold the loan agent’s feet to the fire if the delays are on their end and not yours.

 

Your Rate vs. Headline Rates: Every Thursday Freddie Mac publishes a rate survey from the previous week. This is source material for virtually all media. In addition to the fact that those rates are expired by the time you’re reading about them, there’s lots of fine print the headlines don’t catch including: those rates are only for loans to $417k, single family homes only, owner-occupied only, and most of those loans have .7% to .8% in points (aka extra fees). Rates on this website are more timely, but again, a rate quote is based on your profile and your property profile so it must come from a lender to be specific.

 

What If Rates Drop More During Loan Process: When you lock a rate, you’re setting that rate then the market will go up or down. It’s very much like buying a stock. The main difference is that lenders have what they call ‘renegotiation’ policies if rates drop after you’ve locked. All renegotiation policies are similar in that rates have to drop significantly for you to be able to capture some of that drop after you’ve already locked a rate. Bottom line: renegotiations don’t let you capture the entire gain because you’ve already made a commitment. So as an example, if you locked a rate at 4.75% and the quoted rate for that same unlocked loan a week later dropped to 4.5%, most lender renegotiation policies will give you half of the gain which would put you at 4.625%.

 

Julian Hebron is San Francisco branch manager and a top producer for RPM Mortgage and also runs mortgage and housing blog The Basis Point.

The US Government has been supporting Fannie Mae and Freddie Mac since 2008. The downgraded rating is result in a downgrade in all US backed debt. Although the rating is lower, investors know this is a sign of slow economic growth in the US, not an isolated hit on Fannie Mae and Freddie Mac. Since then, investors have flooded their money out of the stock market into safer investments with surging prices  in commodities, such as gold, as well as long term bonds including Fannie Mae and Freddie Mac backed securities. The result, lower mortgage rates.

It may seem odd that investors are buying a security immediately after its rating was lowered, but that’s exactly what’s happening. Mortgage securities backed by Fannie Mae and Freddie Mac are reaching their highest prices of the year leading to a drop in mortgage rates.

Starting October 1st, 2011, the USDA will be implementing an annual fee which is very similar to a mortgage insurance premium.  This fee will be added to the homeowners monthly payment.  The USDA will still allow the client to buy with no money down.  Similarly to FHA loans, this is due to the increased demand for USDA loans since the market has heavily relied on government-backed home loans.

Between 2006 and 2010, FHA had increased their market share more than 500% going from 3.77% to 19.13%.  In 2010, the USDA also had seen a large increase in market share and temporarily suspended insuring home loans due to limited funding.

The only government-insured home loan that has not seen an increase is VA loans (loans for qualified military veterans), but don’t be surprised if we see one.  As more troops return from Afghanistan and Iraq, more veterans are using their VA loan entitlement to purchase a home.  I’m sure the VA would like to see the program continue under it’s current terms but if they begin to run out of funds, they’ll have no choice to but to raise the premium for VA loans by charging more.

UPDATED 9/19/2011

I’m happy to announce the VA is changing their fees, but for less!  This both surprising and welcomed.  The VA announced on Sept. 8th, 2011 (Circular 26-11-12) that the VA will temporarily change their Funding Fees effective October 1st.  The change lowers the fee for most scenarios.

Below is a chart showing the changes effective Oct. 1st, 2011.  You’ll notice the only two scenarios that do not result in a reduced Funding Fee is when the transaction is a VA-to-VA loan transaction.

The largest impact will be directly to mortgage loans that are being contracted to close during the shutdown. Many new applications will sit stagnant while we wait for congress to come to a resolution. How badly this will affect the housing market will depend heavily on how long the shutdown is. For all the work the government has done to avoid a double-dip housing recession with bailouts and government programs (such as the Making Home Affordable programs) their inability to resolve budget disputes may be the direct cause of another drop in house values. 

WHAT FEDERAL AGENCIES WILL BE AFFECTED AND HOW WILL IT IMPACT THE MARKET?

FHA

Specifically, FHA is getting a lot of attention and rightfully so. FHA has been a savior to the mortgage industry since 2008 at the beginning of the recession providing affordable loans with reasonable credit guidelines. From 2005 through 2007, FHA never represented more than 4.25% of all the home loans originated. In 2010, FHA represented over 19% of all home loans and a whopping 30% of new home sales. These statistics have been published directly by the Department of Urban and Housing Development. FHA will not insure home loans during the shutdown. Lenders may choose in their own discretion to fund the loan and request insurance after the shutdown is over.

VA

As of right now, most reports show that the Department of Veterans Affairs will not be impacted. This is good news for veterans who are currently looking to buy a home.

USDA

The USDA (US Department of Agriculture) insures affordable home loans for rural areas. The USDA will not insure new home loans and I’ve received reports that their automated underwriting engine (Guaranteed Underwriting System) will not operate. This not only halts the funding of some USDA loans, but will prevent lenders from pre-approving buyers for this program. Although USDA represents a much smaller percentage of loans than FHA, this program is hit the hardest of the three. Lenders can still manually underwrite the files but most will require the assurance of USDA’s program to approve a client. This is unfortunate after the government spent months working on a budget to fund the USDA after they ran out of loan funds for a portion of 2010. It does sound like USDA lenders will be able to close loans with a conditional commitment up to 90 days of the commitment, but new applications will not be processed and new prospective buyers won’t be able to get pre-approved. Like FHA, lenders may choose to close the loan and wait for the shutdown to end before sending the loan to the USDA at their own discretion.

IRS

Now, let’s talk about the big entity nobody is talking about when talking mortgages, the IRS (Internal Revenue Services).

Many of you are wondering, “How does the IRS have an effect on the mortgage industry?” There’s many ways the IRS can affect home loans since we use tax documents to verify income, but not in the most obvious way.

Mortgage lenders rely heavily on tax documents to calculate and verify a homebuyer’s income. Most homeowners will have their tax documents on hand, but the mortgage industry needs more than a copy of the documents.

Prior to the mortgage meltdown, mortgage lenders trusted their consumers that the tax documents they received were accurate and complete. Lender guidelines have since changed. To avoid fraud and also catch amended tax returns, mortgage guidelines require verification from the IRS that the tax documents the lender has reviewed were accurate and complete. These verifications are done by tax transcripts ordered by the lender to the IRS. You can read more about why transcripts are required here.

Lenders are now requiring transcripts on virtually all loans being processed. Specifically, Fannie Mae and Freddie Mac require transcripts for every loan file. I’ve found some reports that state Fannie Mae and Freddie Mac will remain operational, indicating that consumers can obtain a Fannie Mae or Freddie Mac conventional home loans with no issues. That is only partially true. If the government were to shut down, any consumer who’s applying for a Fannie Mae or Freddie Mac loan will not be able to close on a loan unless the lender had already verified the tax transcripts with the IRS. Any Fannie Mae or Freddie Mac loan not including transcripts cannot be closed.

This is an issue that appears to be overlooked and will have a larger impact than many have considered. Yes, FHA will have a huge impact, but adding Fannie and Freddie to the mix is a whole different story. According to Fannie Mae, they are the largest issuer of mortgage related securities in the second market representing 44% of the marketplace in 2010.

Fannie Mae and Freddie Mac represent more than 60% of the home loans originated today, plus FHA represents over 15%. Not including USDA loans, those three entities already represent more than 75% of all home loan issued today. If gone unnoticed, this government shutdown will have a much larger impact than many are expecting.

Do I think this will destroy the housing market? Honestly, I don’t. At one point, the government will realize the size of this impact and implement some type of action plan. I just hope this is noticed before there’s a government shutdown, not after.

TIPS FOR HOMEOWNERS:

Here are a list of items I would recommend be completed based on the type of loan you’re looking to close.

ALL LOANS

· Order your tax transcripts immediately.

· I haven’t been able to find exact details, but I would order any outstanding flood certifications if you haven’t determined if the property is in a flood zone.

FHA

· FHA Connection will still be up to order case numbers but CAIVRS (a program that does a background check on all parties involved in the transaction)will be down, so have your lender order your CAIVRS Reports right away.

USDA

· USDA will only insure loan commitments already issued (90 day expiration). If you still have time, try to get your commitment approved prior to the shutdown.

· GUS will not be operational, so all buyers looking to get pre-approved on USDA should process their pre-approval right away and new loans should be ran through GUS if they haven’t been done yet.

This is a program designed to help high school students understand money and finances as they prepare themselves for life outside of school.  For years, I’ve felt that topics such as credit, finance and investing should be taught at a younger age. 

I came across this topic on a blog post on the US Treasury’s website.  I can’t express how excited I am to see something like this available for our young adults.  The basic idea is to provide high school students with education on how to handle their finances.  Too often I’ll talk to first-time-buyers who had wished for education to better prepare them for managing their personal finances.  Dave Ramsey has talked for years about the importance of teaching young adults the values of money management, and I couldn’t agree more.

What’s more exciting is the quality of the content.  Investing, insurance, budgeting, and investing in yourself through education were all included in the curriculum.  They even include web-based video games where students can play along and test the knowledge they’ve gained.  Genius!  This year’s challenge has already started and is only running until April 8th, 2011.  If you believe in empowering our youth with education, please help to spread the word.

Here are some important links:

• Educator Toolkit
• A Letter to spread the word to our educators, friends and family
• A FAQ on the National Finance Capability Challenge
• Link to where Educators can Sign Up
• Statistics from last year’s challenge

For someone who’s personally tried to assist a client in qualifying for this, I tend to agree with this movement.  The concept of the program is good and it may be true that principal reduction is required to prevent some foreclosures, but we’ve learned from HARP that the key to a successful program is to design a program that is beneficial to both client and lender AND must also have an existing infrastructure for lenders to implement the program easily.

HAMP and other programs have had failures because prior to the recession, lenders did not staff professionals experienced in loan modifications.  The time it takes to train people is lost time for a slippery housing market.  HARP has received its 2nd extension and represented a whopping 10% of all the refinance activity in 2010.  Why has the program been more successful than its counterparts?  Easy, the program is nothing more than a loan with different guidelines.  Loan officers, processors and underwriters only had to learn a few guidelines to add this program to their menu of loan options.  Lenders already staffed loan officers and the operation staff to support the program.  Even with this program was easy to implement, we’ve still needed time for lender participation and customer awareness to become effective. 

The FHA short refinance program had the staff to support the program like HARP but there were two elements that made this program too difficult.  One, most FHA lenders didn’t employ the staff to negotiate a short-payoff with an existing lender.  Two, there weren’t enough lenders who were willing to take a short-payoff on a loan that was underwater.  The program had incentives in place for the lenders if they accepted a short-payoff but details of the incentives were too vague and lender participation on both sides of the transaction have been minimal.

If anything, the introduction of the FHA short refinance program hurt the housing market.  Prior to the release of this program, FHA allowed homeowners to refinance to a FHA loan up to 97.75% of their home value and no limit on a second mortgage.  This gave homeowners an option to refinance if only their second mortgage was underwater and they didn’t have a Fannie Mae or Freddie Mac eligible first mortgage (a requirement for HARP).  When FHA released the short refinance program, the option to refinance above the value of the home without a short refinance was removed.  All homeowners who didn’t have a HARP eligible first mortgage lost their only option unless their current lender was willing to take less than the balance due, which rarely took place.

If congress is successful in killing the short refinance program, I hope they convince FHA to change to their old guidelines where FHA allowed second mortgages above the home value.

Lender guidelines and participation have steadily grown since HARP’s inception.  Many homeowners don’t know of the program and need this extra time to refinance their home.  I believe this is an excellent decision and should have a positive impact to our housing market.    

According to an article from BusinessInsider.com, only 220,000 homeowners have refinanced under HARP where an expected 4-5 million were projected at the program’s inception. 

UPDATE 3/14/2011

The 220,000 closed HARP loans mentioned in the BusinessInsider.com article is inaccurate.  This figure was published by Alan Zibel on March 5th, 2010, over 1 year ago.  An article from MortgageNewsDaily.com has indicated that 621,083 HARP refinances were closed in 2010 alone.  It’s not the 4-5 million they hoped for but there’s no question that lender participation and consumer awareness have grown. 

Here’s a copy of the announcement: 

FHFA Extends Refinance Program By One Year   

Washington, DC– Federal Housing Finance Agency Acting Director Edward J. DeMarco has announced an extension of the Home Affordable Refinance Program (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2012.  The program was set to expire on June 30 of this year.  In addition, Fannie Mae and Freddie Mac will make the following adjustments to their programs:  Freddie Mac will exempt HARP loans from their recently announced price adjustments and Fannie Mae will conform their eligibility date to May 2009.    The program expands access to refinancing for qualified individuals and families whose homes have lost value.  HARP has grown over the past year.  In 2010, Fannie Mae and Freddie Mac purchased or guaranteed more than 6.8 million refinanced mortgages.  Of this total, 621,803 were HARP refinances with LTVs between 80 percent and 125 percent. This is up from 190,180 in 2009, when HARP began.  

Here’s a link to the announcement:   

http://www.fhfa.gov/webfiles/20399/HarpExtended0311.pdf   

I have two suggestions related to this topic for homeowners:    

• One, if I had an investment property, I would try to refinance it as soon as possible.  Certain pricing guidelines that benefit investment properties appear to be a “loophole” in the guidelines.  This helps investment properties price very well but appear to be designed for homeowners, not landlords.  If the FHFA had let those guidelines slide since HARP was expiring soon, they may very well change them now that the deadline has been extended.
• Two, if you have a loan with PMI, this is the chance to let your voice be heard and let the government know that they should loosen guidelines to allow PMI backed loans to be done by outside lenders.  Too many people have their loans serviced by lenders who will not do PMI HARP loans or have their loan serviced by a company who does not originate loans at all.  These homeowners are well qualified and deserve to have their mortgage refinanced.  Being left behind due to an unlucky transfer of servicing to a mortgage company who does not originate new loans is not an acceptable reason for why these people cannot refinance their loan.

HUD (US Department of Housing and Urban Development) Homes are homes that were foreclosed with a FHA loan on the property.  These homes often offer special financing options, such as special FHA loans with as little as $100 down.

Sounds easy, but there are many obstacles that can delay or kill your HUD Home purchase completely.  Here are some common myths about HUD Homes:

JUST BECAUSE IT’S A HUD HOME DOESN’T MEAN YOU CAN DO A FHA LOAN

One of the biggest mistakes I’ve seen is the assumption that all HUD homes qualify for FHA financing.  Not true.  Just because there was a previous FHA loan doesn’t mean they can be financed with a FHA loan.  They still require the property to pass a HUD compliance inspection.  If the property doesn’t meet FHA requirements, you either must deposit money in escrow to fix the items (Maximum $5,000), do a FHA 203k Rehabilitation Loan or choose another form of financing.

I CAN ORDER MY OWN FHA APPRAISAL

These homes already have a FHA appraisal issued to the property.  This means you must use this appraisal if you’re doing a FHA loan UNLESS you’re doing a FHA 203k Rehabilitation Loan.  If you do not like the appraisal and want to do a traditional FHA loan, tough luck.  All non-203k FHA loans must use the appraisal issued with the property.  This means that if you bid higher than the appraised price, you must cover the difference between the sales price and the appraisal with cash.

CLOSING COSTS LOOK LIKE A TRADITIONAL FHA LOAN

There are a few adjustments you’ll need to know about HUD Homes for closing costs that is unique for these purchases.

• Since there’s already a FHA appraisal, you do not need to pay for the appraisal if you’re using a FHA loan to purchase the property
• HUD will pay the escrow fee on the transaction
• The buyer must pay for the sellers title insurance policy

One thing to note is that you will not be able to choose the escrow company on these transactions.  HUD determines the escrow company by the state or area.

I NEED HUD TO SIGN MY AMENDTORY CLAUSE

There’s a disclosure that’s typically required for all FHA loan purchases called an Amendatory Clause.  This form is used to protect the buyers interest in the event the FHA appraisal does not meet the value of the home.  However, HUD homes are already appraised by an FHA approved appraiser, so this form is not needed.

KEYS TO A SUCCESSFUL HUD TRANSACTION

Work with a lender who’s done a loan on a HUD home once before.   Be sure that the lender is well versed in 203k rehab loans.  These loans are critical for financing many of the HUD homes available.  Be sure the lender also knows a good, HUD approved compliance inspector and a good 203k Cost Consultant.  This will insure that you have the right professionals helping you if the property needs work before you can close on your purchase.   Also make sure your lender knows a HUD approved foundation inspector if you’re buying a manufactured home.  These homes require a foundation certification to be eligible for FHA financing.

You can find HUD Homes for sale at www.hudhomestore.com

UPDATE 6/8/2011

HUD Mortgagee Letter 2011-19 states that homes financed under the $100 down incentive cannot use a higher appraised value to finance closing costs and prepaids. See this POST for details.

UPDATE 8/23/2011

Some loan programs allow other buyers on the property title even if they’re not on the loan.  HUD will not allow this on a HUD transaction.  Be sure you only write the contract where all buyers are on the loan documents.

UPDATE 12/16/2011

Many HUD Homes require an escrow hold back to qualify for FHA financing.  HUD will allow buyers to finance these amounts up to $5,000 when purchasing a HUD home.

In the past year, I’ve received requests from many consumers to help them with their mortgage.  After multiple requests, I decided to commit to helping clients in other states.  Cobalt Mortgage is licensed in several states on the west coast.  I plan on obtaining a license in all the states Cobalt is licensed in starting with California, which I’m proud to announce has been active as of December 31st, 2010 (License #CA-DOC 115042).  Oregon and Arizona will be next, followed by New Mexico and Idaho.

I wanted to take a minute and thank all of the people who have referred others to me.  I’ll keep everyone posted on my licensing updates for new states as they come on board.

One of the changes we’ve seen in the mortgage  industry is lenders requiring the actual transcripts in a loan file before they’ll close.  This means that the tax return filings must be filed and ample time must be given for the IRS to update their database with the filed returns before a consumer can close on the loan.  This process can take several months AFTER the IRS actually receives the tax returns! This has caused issues with consumers buying or refinancing who do not have filed tax returns due to extensions or the tax returns are filed but they’re simply waiting for the IRS to show them in their system.  What happens if they can’t get the transcript?  Simply put, most mortgage lenders will not let the consumer close on a loan.   This is not an issue for many consumers but for the few who have late filings or amended returns, this could be disastrous.

I’VE SENT MY MORTGAGE COMPANY MY TAX RETURNS…WHY DO THEY NEED MY TRANSCRIPTS?

For those who haven’t seen a transcript, it’s basically a summary of everything you would see on a 1040 tax return filing.  1040 tax returns are typically requested for a mortgage application and along with all schedules/worksheets, gives all detail as to how the tax return was filed.  So why would a mortgage company need a transcript?  It’s a good question that I hear often from my clients.  Here are several reasons why lenders request IRS transcripts:

• WAS THERE SOMETHING WE WERE MISSING?- Transcripts will show figures from all applicable schedules that may not show on the 1040 tax returns.  For instance, a Schedule C shows a breakdown of business income and expenses.  Also, a Schedule E shows a breakdown of all investment real estate income and expenses.  Many consumers will only send the 1040 returns and not include schedules.  These figures affect a loan application and the way a lender sees a consumers portfolio.
• DID YOU AMEND YOUR TAX RETURNS?- A consumer may be giving their mortgage company a tax return, but what if their accountant did a small amendment that the consumer forgot to disclose?  The transcripts will show the correct figures as received by the IRS including any updates.
• WE HAVE TO USE THE “F” WORD, BUT HOW DO WE KNOW THE TAX RETURNS AND TAX FORMS AREN’T FRAUDULENT?- Maybe not the “F” word you were thinking of, but in our industry, this word is a million times worse.  One of the reasons lenders now request these transcripts is because when they did order transcripts on OLDER loans that defaulted, they found many of them had fraudulent documents including fraudulent tax forms and returns.
• ARE YOU BEHIND ON YOUR TAXES?-  You can buy a home with taxes due, but you can’t if the IRS files a lien.  The consumer transcripts will show if the consumer had a large tax bill due.  If there was, the lender is likely to ask for proof that the taxes were paid.

This is one of the reasons it’s so important that both the client and lender follow due diligence and collect ALL documentation prior to committing to a closing date on a loan.  Especially on a home purchase where there’s a seller involved.  Lenders should be requesting these transcripts at the beginning of the loan process, not the end.  I’ve heard too many horror stories of “Approved” consumers who are turned down at closing because the tax transcripts are not available.  It’s fairly new, so more mistakes will be made now than later.

I NEED A MORTGAGE AND MY TRANSCRIPTS ARE NOT RECEIVED BY THE IRS…WHAT CAN I DO?

Every lender policy regarding tax transcripts will vary but for the most part, most lenders want these to close. on a loan  If you need a mortgage now and haven’t filed your returns, be sure to disclose this to your lender and prepare your returns for filing as soon as possible.  When they’re completed and ready to be filed, you can get your returns expedited to the IRS through their local Taxpayer Advocate Service (TAS) office.    For those that don’t know who TAS is, here is an excerpt from their website:

The Taxpayer Advocate Service is Your Voice at the IRS!

Taxpayer Advocate Service (TAS) Mission:  As an independent organization within the IRS, we help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems. Here are seven things every taxpayer should know about TAS: 1. TAS is your voice at the IRS. 2. Our service is free, confidential, and tailored to meet your needs. 3. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn’t working as it should. 4.  TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals. 5.  TAS employees know the IRS and how to navigate it. We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 6.  TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico.  You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS, and on our website atContact Your Advocate.  You can also call our toll-free case intake line at 1-877-777-4778. 7.  You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www.taxtoolkit.irs.gov

From my experience, a local TAS office can rush the filing, provide receipt of the filed tax returns, provide accurate dates as to when the transcripts will be available and sometimes even write letters in behalf of the consumer stating the returns were filed and received by the IRS.  This can be very helpful if you need to close on your home loan quickly.