Tax documents for a mortgage: what the lender asks for, then the 1098

A lender uses your tax documents to prove that your income is real and likely to continue. Pay stubs show the present. Returns and year-end forms show the history. Most conventional loans follow the Fannie Mae Selling Guide or the Freddie Mac Guide, so their rules set which years and which schedules you hand over.

The returns must be copies of what you actually filed with the IRS, with all supporting schedules (Fannie Mae Selling Guide B3-3.1-02). A draft from your tax software is not enough. Each return must be signed, unless the lender has a signature alternative such as proof of e-filing, a signed Form 4506-C for that year, or IRS transcripts (Fannie Mae Selling Guide B3-3.1-02).

A tax transcript is an IRS printout of the figures from a filed return. The guide lets the lender use transcripts in place of returns in some cases (Fannie Mae Selling Guide B3-3.1-02), so ask the loan officer which one they want before you scan anything.

If you already have the loan, the tax paper you are after comes from the servicer. A lender files Form 1098 to report mortgage interest of $600 or more received during the year (Form 1098 instructions). It also shows points and, when paid, mortgage insurance premiums. If your loan was sold during the year, expect one Form 1098 from each servicer.

The 1098 does not hold everything. The closing disclosure shows points paid at closing, including points the seller paid for you, and the property tax paid at settlement. Keep it with the return for the year you bought, and keep it after that as part of the home’s cost.

Took a home equity line after closing? Its interest counts only for money that went into buying, building or substantially improving the house behind the loan (IRS Publication 936), so keep the contractor invoices with the HELOC statements.

An employee with only wages usually hands over Forms W-2 and recent pay stubs, and the lender may ask for returns too. A self-employed borrower hands over much more. In the Selling Guide, anyone with a 25% or greater ownership interest in a business is considered self-employed (Fannie Mae Selling Guide B3-3.5-01 (formerly B3-3.2-01)).

For that borrower, the lender gets signed individual and business returns for the past two years, with all schedules (Fannie Mae Selling Guide B3-3.5-01 (formerly B3-3.2-01)). One year of returns can be enough when the business has existed for five years and you have owned 25% or more for five years in a row (Fannie Mae Selling Guide B3-3.5-01 (formerly B3-3.2-01)). A business return is the entity’s own filing, such as Form 1065 for a partnership or Form 1120-S for an S corporation, and it comes with your Schedule K-1.

Form 4506-C is the IRS form that lets a lender request your tax transcripts directly through the IRS. It covers up to four years or tax periods and is valid for 120 days after you sign it (Fannie Mae Selling Guide B3-3.1-02). Each borrower whose income counts signs a separate one at or before closing (Fannie Mae Selling Guide B3-3.1-02).

One form requests one type of return. A self-employed borrower with personal and business returns therefore signs one Form 4506-C for the Form 1040 and another for the business return (Fannie Mae Selling Guide B3-3.1-02). If the transcript does not match the copy you gave, expect questions, so hand over the version that was actually filed.

Sometimes no form is needed at all. When the DU validation service validates all of a borrower’s income, the lender does not need a signed Form 4506-C for that borrower (Fannie Mae Selling Guide B3-3.1-02). Your loan officer sees this in the automated findings, so ask before you sign a stack of forms.

Gather the tax side of the file before the lender asks. It is the slowest part, because a lost W-2 has to come from a former employer and a missing return from the IRS. Bank statements, ID and the purchase contract are on the mortgage document checklist, not here.

1. Pull the last two filed returns as PDFs, with every schedule and the signature page.
2. Line up each income source with two years of its own forms, for example a W-2 per employer or a 1099 per client.
3. If you own part of a business, add its returns and your Schedules K-1 for the same years.
4. Check whether your latest return showed a balance due, and add proof of payment or the payment plan.
5. Sign Form 4506-C when the lender sends it, and note the date: it lapses after 120 days (Fannie Mae Selling Guide B3-3.1-02).

• Fannie Mae Selling Guide B3-3.1-02: Returns must be copies of what was filed, signed or with a signature alternative; Form 4506-C covers up to four periods, is valid 120 days, one form is needed per return type, and none is needed when DU validates all of a borrower’s income.
• Fannie Mae Selling Guide B3-3.5-01 (formerly B3-3.2-01): A 25% owner is self-employed; two years of signed personal and business returns, or one year when the business has existed five years with the same 25% owner; transcripts may be used; the business is documented by an EIN confirmation letter, business license, articles of incorporation or partnership agreement.
• Form 1098 instructions: Form 1098 reports mortgage interest of $600 or more received from an individual during the year, one form per mortgage.
• IRS Publication 936: Interest on a home equity loan is deductible only to the extent the money was used to buy, build or substantially improve the home securing it.