A new Internal Revenue Service form enables mortgage lenders to electronically verify income with the agency.
As of Oct. 1, an income verification form known as a 4506-T is being used earlier in the loan process and is going from a paper to an electronic filing, meaning it can be reviewed much earlier by lenders.
“The 4506 is the great equalizer,” said David Patterson, the founder and president of Pacesetter Mortgage in Lansing, MI, and the president-elect of the Michigan Mortgage Brokers Association.
“If a borrower lies about their income on the mortgage application then that is mortgage fraud,” said Patterson, who also blogs about the industry through his Web site, PacesetterMortgage.com.
But the problem in that past is that the form was used primarily after the loan was closed, Patterson said. Under the new electronic system, mortgage lenders get the verified income information within two business days.
“That means that if you commit fraud on your mortgage application by overstating your income, the lender can find this out before the mortgage loan closes,” he said.
Patterson said the forms are used by lenders to compare what a borrower told the IRS about their income and what they submitted on their loan application.
“It used to be, many years ago, that to verify a borrower’s income we had to send written verification forms to” employers, he said. “To speed up the collection of this data, the mortgage industry today relies on the borrower’s pay-stubs and W-2 forms.”
Because home computers and other technology have made it easier to create forged documents, the industry relies on the forms as a “back up audit tool,” Patterson said.
“The mortgage lending industry knows that you will tell the IRS that you make as little as possible to avoid paying income tax,” he said. “On the other hand, it is a temptation to some to tell lenders to stretch their income to qualify for a mortgage loan.”
