Section 1.37 Income Validation Guidelines

Transcription

1 Section 1.37 Income Validation lines In This Section This section contains the following topics. Income Validation Requirements... 2 Overview... 2 Related Bulletins... 2 IRS Form 4506-T Requirement... 3 General... 3 Acceptable Vendors... 3 IRS Processing... 3 Completing the IRS Form T... 4 Instructions for Completing the IRS Form T... 7 Evaluating IRS Form 4506-T Results and Variances... 9 Evaluating IRS Form 4506-T Results... 9 Evaluating Income Variances... 9 Evaluating Variances for Salaried Borrowers Evaluating Variances for Self-Employed Borrowers Obtaining Transcripts for Tax Returns Recently Filed Tax Returns Most Recent Tax Year Returns Have Not Been Filed Other Unique Validation Types Newly Employed Borrower Previous Full-Time Student Military Borrowers in a Combat Zone During Tax Season Borrowers on Temporary Leave/Short Term Disability Disability, SSI or Pension Reported on a Amended Tax Returns Rejected IRS Form 1040 Transcripts Income Validation lines Page 1 of 15 Correspondent Seller

2 Income Validation Requirements Overview This section provides guidelines for income validation. The IRS Form 4506-T is used to validate the income documentation that the borrower has provided and to validate that the income the borrower is using to qualify for the loan is reasonable compared to the borrower s prior earnings. An IRS 1040 transcript must be obtained by using the IRS Form 4506-T for ALL borrowers. Key Loan Program: The most recent two (2) year s tax returns are required. For Agency Loan Programs: The most recent one (1) or two (2) year s transcript and/or tax returns as required by Agency guidelines and/or AUS findings. However, when evaluating an income variance, additional years may be required. Qualifying income sources that are too new to be reported on the most current year tax transcripts, may still be eligible to be used for qualifying purposes, as long as acceptable alternative validation methods are used. If non-taxable income is the only source of income, and cannot be validated through the 4506-T process, then alternative validation documentation must be obtained, such as 1099 transcripts, award letters or bank statements. lines in this section do not replace or override income documentation requirements for the applicable loan program. In cases when transcripts are not available, such as tax-exempt income or borrower(s) have filed an extension, the 4506-T may still need to be processed to document No Record Found. These guidelines apply to ALL occupancy types and all SunTrust (traditionally underwritten and AUS processed) loan programs, to include conforming and non-conforming loan amounts. Related Bulletins Related bulletins are provided below in PDF format. To view the list of published bulletins, select the applicable year below Income Validation lines Page 2 of 15 Correspondent Seller

3 IRS Form 4506-T Requirement General The IRS Form 4506-T is a request for income tax transcripts and is required to be executed (i.e. signed by all borrowers) at application. A processed IRS Form 4506-T is required on ALL SunTrust loan programs regardless of DU/LP Findings, documentation type, income type, or origination source. A signed IRS Form 4506-T requirement applies to all of the following: Conventional (including Agency and Non-Agency loans), FHA, VA, and Key Loan programs. Fully documented transactions, Traditionally underwritten loans, AUS (DU and LP) loans, and Salaried or Self-employed borrowers. Prior to submission to SunTrust for underwriting, the IRS Form 4506-T must be processed by the Correspondent lender and returned from the IRS for all borrowers. It is imperative that the 1040 transcript be reviewed in its entirety to ensure all information correlates with what borrower(s) have stated on the 1003 loan application. Acceptable Vendors Establishing a relationship with a vendor can save time in validation and processing, however, it does not come without a cost. Although SunTrust cannot endorse or recommend a specific company, both Rapid Reporting and InfoLink are companies lenders may chose to sign up with. Rapid Reporting: InfoLink: Vendors may provide a Record of Account for the IRS transcripts, since they are able to access the IRS.gov portal for the information. Vendors may or may not have a charge. IRS Processing Another available option for the lender is to send to the IRS directly. The turn time may be 4-6 weeks depending on the time of the year. IRS contact: The IRS may charge for each document requested. Income Validation lines Page 3 of 15 Correspondent Seller

4 IRS Form 4506-T Requirement, Continued Completing the IRS Form 4506-T The request for a Transcript of Tax Returns IRS Form 4506-T for origination should reflect the Correspondent lender s name as party to receive the transcript. The lender does not need to secure a transcript in SunTrust s name. If the Request for Transcript of Tax Returns IRS Form 4506-T for closing reflects the name of a quality control company that does the lender s quality control, they would be the party to receive the transcript. SunTrust is not currently requiring that SunTrust be listed on #5 on the request form. It is imperative that the IRS Form 4506-T be completed accurately AND legibly to avoid delays and errors. Information contained on faxed documentation may degrade and become illegible and this may also cause rejection of the IRS Form 4506-T. The top portion of the IRS Form 4506-T must be completed exactly as the borrowers filed their last tax return. The borrower s name, social security number and address should appear AS KNOWN BY THE IRS. Note: Confirm how newly married or divorced borrowers filed their previous year s tax returns and use the name as it appeared on the return. The font type or handwriting on the IRS Form 4506-T must be consistent. Any alternate spelling of the borrower s name should be included on the IRS Form 4506-T. Unmarried borrowers must complete a separate IRS Form 4506-T. MARRIED borrowers who are both on the loan and who have filed jointly ONLY need to complete and sign ONE 4506-T form to be processed with the IRS. If the borrower is married and filed jointly, but the sole applicant on the loan, the names on the IRS Form 4506-T must be as they appeared on their prior tax return, but only the borrower s social security number and signature are required. The IRS Form 4506-T must be signed and dated by the borrowers. Faxed signatures are acceptable. All IRS Form 4506-T requests for recently divorced borrowers who filed a joint tax return for the previous year, must contain information for both spouses in lines 1 and 2 of the IRS Form 4506-T. The names must be as they appeared on their last tax return, but only our borrower s social security number and signature are required. Notes: IRS form 4506-T Form that the IRS cannot read, will NOT be processed; however, the client WILL BE CHARGED. E-signatures on the IRS form 4506-T cannot be processed by the IRS. Income Validation lines Page 4 of 15 Correspondent Seller

5 IRS Form 4506-T Requirement, Continued IRS Form 4506-T Documentation Types A 1040 transcript must be provided for all borrowers. In order to assist in determining what type of documentation to request via the IRS Form 4506-T, the following revised matrix has been added to the guidelines: If Borrower is... Income Documentation to request from Borrower To Validate the Income Documentation Request via 4506-T Salaried Including Commission 25% or more Receives Pay stub Receives W-2 or 1099 Self Employed Sole Proprietor Self Employed LLC, LLP, Corporation, Partnership Pension, Social Security/Disability Borrower All other income (such as alimony, child support, dividend and/or Documentation as required by AUS/Underwriter Documentation as required by AUS/Underwriter Documentation as required by AUS/Underwriter Documentation as required by AUS/Underwriter Documentation as required by AUS/Underwriter 1040 Transcript for 1 or 2 Years Transcript for 1 or 2 Years Transcript for 1 or 2 Years 2 May require valid corporate/partnership tax return (at the discretion of the underwriter) 1040 Transcripts for 1 or 2 Years 1, Transcript 1,2 interest, etc.) 1 If non-taxable income is the only source of income, and cannot be validated through the 4506-T process, then alternative validation documentation must be obtained, such as 1099 transcripts, award letters or bank statements. 2 In cases where borrowers have filed taxes jointly, it may be necessary to request W-2 transcripts via the 4506-T, in addition to the 1040 transcripts, in order to determine an individual s income. ** These are standard documentation scenarios. Other documentation could apply. If year-end or year-to-date Profit and Loss (P&L) statements were used to calculate income for the borrower, those documents must be included in the loan file. Income Validation lines Page 5 of 15 Correspondent Seller

6 IRS Form 4506-T Requirement, Continued IRS Form 4506-T Documentation Types, (continued) Qualifying income sources that are too new to be reported on the most current year tax transcripts may still be eligible to be used for qualifying purposes, as long as acceptable alternative validation methods are used. If non-taxable income is the only source of income and cannot be validated through the IRS Form 4506-T process, then alternative validation documentation must be obtained, such as 1099 transcripts, award letters or bank statements. Upon reviewing the 1040 transcript, if there appear to be red flags that require additional validation, the IRS Form 4506-T may need to be reprocessed for W-2 or 1099 transcripts. To Qualify the Borrower The Correspondent lender must provide the streamlined documentation as required by the AUS findings (i.e., a pay stub and a verbal verification of employment) or what the Underwriter may require. For Traditionally or manually underwritten loans, standard documentation is always required. To Validate the Income of the Borrower The Correspondent lender must order the 1040 transcripts for the most recent year available. It is not necessary to collect these documents from the borrower unless AUS or the Underwriter requested them. Income Validation lines Page 6 of 15 Correspondent Seller

7 IRS Form 4506-T Requirement, Continued Instructions for Completing the IRS Form 4506-T It is recommended that all information on the IRS Form 4506-T be reviewed to ensure the quality and legibility of borrower information prior to submitting the IRS Form 4506-T to the vendor or IRS, so there is no likelihood of rejection or unnecessary fees. Complete items 1-4 with the appropriate borrower information. Complete Line 5 with appropriate lender information (the mortgage lender s company name, address, city, and state). The information must be typed or stamped (the IRS no longer allows stickers or labels). See the example below for information regarding how to properly complete the IRS Form 4506-T request: Common errors that are often found on the IRS Form 4506-T include, but are not limited to, the examples below: Using nicknames (i.e. Becky Smith vs. Rebecca Smith.) Using married vs. maiden name. Inaccurate employer information (i.e. Pizza Hut vs. Robinson, Inc. d/b/a/ Pizza Hut.) Inaccurate address. The second half of the form should be completed as outlined below: Line 6 should include all form types (1040, 1099, or W-2) that are being requested. Line 6a must be checked for transcript only. Leave 6b blank. Note: Box 6b Account Transcript would be checked if a statement of the status of the taxpayer s account is needed. For example, results will show if back taxes are owed. Income Validation lines Page 7 of 15 Correspondent Seller

8 IRS Form 4506-T Requirement, Continued Instructions for Completing the IRS 4506-T, (continued) Line 6c Record of Account must be checked and will include the complete original 1040 transcript plus details of any amendments or extensions that have been filed, as well as all attachments. Box 7 should be answered accordingly. Box 8 must be checked. Complete item 9 with the ending dates of the year(s) or period(s). The form must be signed and dated (if borrowers filed jointly, only one signature is required if only one is on the loan. Note: Generally, the most recent year s tax returns are required; however, when evaluating the variance, additional years may be required. For manually underwritten self-employed loans, 2 years tax returns are always required. Once all information on the IRS Form 4506-T has been completed, submit it to the applicable vendor or directly to the IRS. Income Validation lines Page 8 of 15 Correspondent Seller

9 Evaluating IRS Form 4506-T Results and Variances Evaluating IRS Form 4506-T Results 1040 Transcripts When the transcript is received back from the vendor or the IRS, the first page of the of the transcript is called the Taxpayer Tax Return Summary Report and will identify Order Information such as: Taxpayer Name/Address Taxpayer SSN STM Loan Number Product ordered Party placing the order It is imperative that the 1040 transcript be reviewed in its entirety to ensure all information correlates with what the borrower(s) have stated on the 1003 loan application Transcripts When there are multiple 1099 records, the Tax Year Requested will only show at the beginning of that year s results. Evaluating Income Variances In the event that there are variances between the results from the processed IRS Form 4506-T and the documentation provided by the borrower, an in-depth review by the Underwriter should be made to determine the next steps. Variances between the IRS Form 4506-T results and reported income can occur for both salaried and self employed borrowers. Note: Non-reimbursed business expenses are not an acceptable variance between income documentation provided by the borrower and the IRS Form 4506-T Transcript of Tax Return(s). Outlined below are guidelines to reconcile possible variances between income reported at application and the tax transcripts returned as a result of the processed IRS form 4506-T. Notes: Verified income will always be used to qualify the borrower. Information reported on the tax transcripts should match information reported on the tax returns or W-2 s provided by the borrower. Income Validation lines Page 9 of 15 Correspondent Seller

10 Evaluating IRS Form 4506-T Results and Variances, Continued Evaluating Variances for Salaried Borrowers The IRS Form 4506-T must be processed for all salaried borrowers. For salaried borrowers, a typical pay increase ranges from 3-6%. Reported income based on the application (1003) or income documents (i.e., pay stubs, W-2 s, etc.) provided should be within a 6% variance from the calculated adjusted gross income as reported on the required IRS transcript(s). If the variance is greater than 6%, the following guidelines apply: If the borrower changed employers, they must still be in the same line of work or the same position. If current pay stub(s) and a verbal VOE with the new employer can be obtained, current income may be used to qualify. The amount of the increase must be reasonable for the occupation. If the borrower has changed employers and line of work, the borrower must provide sufficient documentation to explain the increase in income (i.e., working while attending school and now is certified in a field). If there is a reasonable explanation, current pay stub(s) and a verbal VOE, then current income may be used to qualify. If the borrower is with the same employer, the increase must be verified, either verbally or written, with the current employer (i.e., recent promotion or increase in salary). If the reason for the increase can be verified, the current income may be used to qualify. If the income increase cannot be documented or explained, then the tax transcript income must be used to qualify. Example: The pay stub provided by the borrower reflects $2,000 received per pay period ($48,000 annualized). IRS transcripts received via the 4506-T request reports $45,000/yr. The income reported on the pay stub is within 6% of the income validated through the processed IRS Form 4506-T for the 1040, so the pay stub income may be used to qualify. Evaluating Variances for Self-Employed Borrowers The IRS Form 4506-T must be processed for all borrowers who receive income from self-employment equal to or greater than twenty-five percent (25.00%) or borrowers who receive 1099 or commissions greater than twenty-five percent (25.00%) of their total earnings. The income verified on 1040 IRS transcripts must be within twenty percent (20.00%) of income stated on the 1003 application and verified in the loan file. Variances exceeding 20% must be closely reviewed and evaluated. Additional levels of due diligence are required. The borrower may provide a current year-to-date (YTD) P&L to support the increased earnings trend. Note: Refer to the specific product description for further information and clarification on use of P&L statements, income calculation, and documentation requirements for self-employed borrowers. Income Validation lines Page 10 of 15 Correspondent Seller

11 Evaluating IRS Form 4506-T Results and Variances, Continued Evaluating Variances for Self-Employed Borrowers, (continued) The previous tax year s 1040 transcript, previous year-end P&L, and current year-to-date P&L are used to evaluate the earnings trends as follows: If earnings trends are stable or increasing, then use the average of most recent previous tax year, current tax year, and year-to-date to qualify. If the previous tax year and the current tax year show a decrease in the earnings trend and the year-to-date reflects an increase in earnings, and then use the average of the previous tax year and the current tax year to qualify. If all three years show a decrease in earnings trend, escalate to the Underwriting Manager for further analysis and review of stability of income. Note: Refer to the specific product description for further information and clarification on use of P&L statements, income calculation, and documentation requirements. Income Validation lines Page 11 of 15 Correspondent Seller

12 Obtaining Transcripts for Tax Returns Recently Filed Tax Returns If the loan transaction involves a borrower who has recently filed a current tax year tax return and the current tax year transcript is not available from the IRS, the following must be provided: most recent previous tax year s 1040 transcript, AND copy of borrower-signed 1040s with either: a copy of receipt for electronically filed returns, or an IRS stamped received copy of the 1040, or a Summary Transcript provided by the IRS. If the most recent previous tax transcripts and the current tax year tax returns show earning trends as stable or increasing, lenders may use an average of the previous year and current year earnings to qualify the borrower. If earnings trend shows a decrease, escalate to the lender s Underwriting Manager for further analysis and review of stability of income. Note: If using previous tax year year-end P&L for qualifying purposes the P&L must be audited If earnings trends are stable or increasing, then use the average of most recent previous tax year, current tax year and year-to-date income to qualify. If previous tax year and current tax year show a decrease in the earnings trend, and year-to-date reflects an increase in earnings, then use the average of previous tax year and current tax year to qualify. If all three years show a decrease in earnings trend, the loan may not be acceptable to SunTrust without documented and specific justification for the decline. Use of declining income should be fully addressed and justified in the loan file, including a comparison of typical earnings prior to decline. Note: Refer to the specific product description for further information and clarification on use of P&L statements, income calculation, and documentation requirements for self-employed borrowers. Income Validation lines Page 12 of 15 Correspondent Seller

13 Obtaining Transcripts for Tax Returns, Continued Most Recent Tax Year Returns Have Not Been Filed The following guidance has been provided regarding borrowers who have not filed tax return(s): If a borrower has filed an extension, the following is required: Evidence that the extension was filed; Processed 4506-T showing No Record Found for current tax year; and For salaried borrowers: the previous tax year s 1040 transcript, a current pay stub and previous year s W-2; For self-employed borrowers: the previous tax year s 1040 transcript, previous year-end P&L and current year-to-date P&L to evaluate earnings trend as indicated below. If earnings trends are stable or increasing, then use the average of most recent previous tax year, current tax year and year-to-date to qualify. If the previous tax year and the current tax year show a decrease in the earnings trend and the year-to-date reflects an increase in earnings, then use average of the previous tax year and the current tax year to qualify. If all three years show a decrease in earnings trend, escalate to the Underwriting Manager for further analysis and review of stability of income. Note: Refer to the specific product description for further information and clarification on use of P&L statements, income calculation, and documentation requirements for self-employed borrowers. In situations where the borrower has NOT filed an extension with the IRS and previous 1 or 2 years transcripts are unavailable, obtain one of the following notices, in addition to requesting the W-2 or 1099 transcripts for the tax year not filed: CP 120 Letter requesting tax exemption, or Letter 1615 Overdue Tax Return, or Letter 2050 Overdue Taxes or Tax Return, or Letter 4903 No Record of Filing or Receiving Returns. Otherwise, the loan cannot proceed until the 1040 transcripts are available from the IRS via the 4506-T. Income Validation lines Page 13 of 15 Correspondent Seller

14 Other Unique Validation Types Newly Employed Borrower Previous Full- Time Student The IRS Form 4506-T transcripts are not required to be processed for borrowers who are newly employed and were full-time students immediately prior to the new employment. Borrowers must provide school transcripts to document they were a fulltime student for the most recent two (2) full years. The signed IRS 4506-T form is still required in the loan file. Military Borrowers in a Combat Zone During Tax Season Borrowers serving in a combat zone are allowed an automatic extension from the IRS for the period they are serving plus 180 days after the last date in the combat zone. This extension applies to the filing and paying of the borrower income taxes that would have been due April 15th. The IRS Form 4506-T should be processed for the most recent tax return filed and the borrower would need to provide copies of the tax return for that year. Borrowers on Temporary Leave/Short Term Disability Reference: See the Temporary Leave and Short-Term Disability Income guidelines outlined in Section 2.01 Agency Loan Programs of the Correspondent Seller for guidance. Disability, SSI or Pension Reported on a 1099 For borrowers who receive disability income, Social Security income (SSI) or pensions on a 1099 and indicate they are not required to file tax returns, the lender must process the transcript for the 1040 tax returns. The IRS will return the transcript confirming no tax return was filed. In these cases, the lender may use the awards letter for the applicable income to validate the income disclosed by the borrower. Amended Tax Returns Amended tax returns are typically filed using IRS Form 1040X and are used to correct information on a previously filed tax return. In certain circumstances amended returns may be acceptable however an in-depth review which must be made by the SunTrust Underwriter or Delegated Underwriter to determine if they would be acceptable. Under no circumstances are amended returns acceptable if the loan has already been reviewed and denied by SunTrust or the Delegated Underwriter. Income Validation lines Page 14 of 15 Correspondent Seller

15 Other Unique Validation Types, continued Rejected IRS Form 1040 Transcripts When the IRS rejects the borrower s request for 1040 tax transcripts due to identity theft or other reasons, SunTrust Mortgage will accept alternative documentation. Lenders should use discretion when validating the borrower s income. This could include items such as the prior year tax transcripts, a police report, institutional written VOEs, bank statements supporting payroll deposits, or any other documentation deemed supportive, based upon the specific situation. Follow the guidelines outlined in the table below when the IRS rejects an IRS Form 4506-T request for identity theft or other reasons. When the Reason for the IRS Rejection is Unable to Process, or Limitation Then provide Evidence the IRS rejected the IRS Form 4506-T request, A borrower-obtained Record of Account Transcript, in pdf format, for all applicable years missing from the website, and A signed IRS Form 4506-T for the year(s) impacted by the IRS rejection. Notes: The Record of Account Transcript combines information from the tax account and the tax transcripts. This transcript must validate that the documents provided by the borrower are accurate and may not be used in lieu of the tax returns provided by the borrower. You may need to access the IRS website, Get Transcripts several times, as the location may be temporarily unavailable. Identity Theft Proof identification theft was reported to and received by the IRS (IRS Form 14039) or A copy of the notification from the IRS alerting the taxpayer to possible identification theft, and Validation of the reported income on the tax returns by providing the following documentation: Borrower obtained Record of Account Transcript, in pdf format, for all applicable years missing from or all of the following: W-2 or 1099 transcripts which match the W-2 or 1099 income reflected on the transcripts, Validation of prior tax year(s) income (income for the current year must be comparable to prior to year(s), 1099 Mortgage interest should match reported interest on Schedule A or Schedule E (if applicable), 1099G Unemployment should match reported unemployment (if applicable), 1099 Dividend and Interest should match reported dividend and interest income (if applicable) Do not use the guidelines reflected above when a no record found or data does not match response is received from the IRS. Instead follow the current requirements outlined in Most Recent Tax Returns have not been Filed, previously presented in this section. Income Validation lines Page 15 of 15 Correspondent Seller