Dear Chris, I’m in contract to purchase a home and haven’t filed my tax returns yet for last year. Should I wait to do this after close of escrow?
This is a great question and one you want to review with your lender as soon as possible. In previous columns, I wrote about the importance of being well-prepared for tax season as either a self-employed or an IRS Form W-2 borrower.
Depending on how and when you were pre-approved for your loan, you may or may not need to use your last year’s tax return income to qualify for it.
If you do, your lender must be able to order transcripts (IRS form 4506-T) to verify the return you submitted matches the one posted by the IRS. Unfortunately, this validation process might not be completed in time to satisfy the terms of your purchase agreement.
You could also try to file your return in person at a local IRS office and get it stamped directly by them. Your lender would still need to process IRS form 4506-T, but as long as the results show “no record found,” this is usually acceptable.
However, if your newly filed tax return is not in line with previous year’s tax returns, your lender is probably going to request further documentation. Should you file an extension instead, you have to provide satisfactory evidence of that too. Most importantly, if you owe taxes for the year that you just filed or extended, you will be required to provide proof that they were paid before close of escrow.
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Dear Chris, I want to refinance my condo and was told to shop around for the best deal. But I just co-signed for my daughter’s apartment lease and heard that each time someone runs my credit report it might lower my score. Is this true?
“Most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time,” according to Fair Isaac Corporation (FICO). “Typically, these are treated as a single inquiry and will have little impact on the credit score.” On the other hand, if you don’t have a strong credit profile, this could become problematic.
In addition, the FICO scoring model that is used can be different from lender to lender, which means your shopping experience could be costly.
The biggest thing to keep in mind is that you must individually address all inquiries on your credit report within the last 120 days. You have to include a letter of explanation for each one and documentation surrounding the terms of any new debts/loans not otherwise included on your loan application. Your lender will likely ask you to complete an undisclosed debt acknowledgment form toward the end of your refinance process to make sure nothing gets missed.
Chris Salese is a licensed California mortgage banker and equal housing lender. He can be reached at delsurmortgage.com or 265-9006.