New Tools Help Lenders Verify Income

(The mortgage industry has changed a lot in recent years, and it is now easier than ever to qualify for a loan. )

The lax lending standards that some mortgage companies enforce are causing a lot of problems in the mortgage world in relation to increased cases of mortgage fraud and mortgage default.

Many lenders do not verify income or do low or no-document loans that do not confirm that a person is even employed.

But these loose standards are going to get a little tighter as new tools are being employed that make it easier for lenders to verify that a person makes a certain amount of money to qualify for a loan.

The IRS has updated one of their income verification forms so that everything is now done electronically, making it a lot easier to fill out and complete the forms in an industry where almost everything is done online or over the phone.

An October 1, 2006 article printed in The Los Angeles Times, by Kenneth R. Harney of The Washington Post Writers Group, "Honesty is best policy for loans," looks into the new tools for income verification.

"Starting Monday, it's going to get much riskier to fib about your income when you apply for a home mortgage. That's because the Internal Revenue Service is overhauling a key income verification tool used by lenders and is making it faster and easier to pull up electronically the confidential income tax information of borrowers."

One of the forms used in income verification is the IRS Form 4506-T that enables the lender or bank to obtain transcripts from the IRS that summarizes the potential borrower's income tax data for up to four years.

"Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and non-electronic - making income verifications slow and difficult to fit into lenders' highly automated loan underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages."

"But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing - even on loans to applicants who are not self-employed or using stated-income programs."

This will help speed up the process tremendously, and will probably make it so more lenders and brokers will utilize the form because of the newfound simplicity and ease that was not available before.

The only downside from the industry perspective is that the IRS charges $4.50 per every tax year to look back on, and most lender want to see two years, making each transaction cost $9, which can add up if you are doing a large number of loans per month.

The only other downsides for consumers, is that the form opens up the door for identity theft if it is not signed and dated.

"Wider uses of 4506-T forms could also increase the potential for lender or broker abuse of the system. For example, some large wholesale lenders have required borrowers to sign the forms, but not date them or indicate the tax years to be checked. That allows secondary market investors - the firms that ultimately own and fund the mortgage - to access the data on up to four years of filings long after the 60-day limit prescribed by the IRS."

Just remember to always sign and date your form and never sign incomplete paperwork and you should be free from fraud or identity theft.

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