TAX TRANSCRIPTS GUIDELINES

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TAX TRANSCRIPTS GUIDELINES

Table of Contents

A. Overview ............................................................................................................................. 2 B. Tax Transcript Requirements................................................................................................... 2

Fannie Mae and Freddie Mac Loans .......................................................................................... 2 All Other Loan Types............................................................................................................... 2

1. When Previous Year's Transcripts Are Not Yet Available........................................................ 2 2. Documentation Requirements (when previous year's transcripts are not yet available)............. 3 3. Verifying IRS Tax Refunds or Payments ............................................................................... 3 C. General Requirements for All Programs .................................................................................... 3 1. Taxes Owed For the Most Recent Year.................................................................................. 3 2. Tax Extensions for Previous Year's Tax Return ........................................................................ 4 3. Amended Tax Returns......................................................................................................... 4 4. Unfiled Federal Income Tax Returns...................................................................................... 4 5. Guidance for Analyzing Tax Transcripts.................................................................................. 4 6. Comparing W-2s to IRS Transcripts ....................................................................................... 4 7. Comparing YTD Paystubs and Written VOEs to IRS Transcripts.................................................. 5 8. Business Tax Transcripts...................................................................................................... 5 9. Completion of 4506-C for Business Income ............................................................................ 5 D. Disclaimer............................................................................................................................ 5

Tax Transcript Guidelines

Revised 08/12/2021

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A. Overview

NexBank will require executed 4506-C's to be included in each loan file. The 4506-C (09-2020) should be accurately completed per the instructions on page two of the 4506-C. This includes, but is not limited to, the address of the most recent year's filed tax return matching the address listed on the completed 4506-C (including P.O. Box addresses). Tax transcripts will be processed on all Conforming loans in which income other than W-2 wages or fixed income reported on a 1099 are being utilized for qualifying and all FHA, VA, and NexBank Portfolio loans, excluding FHA non-qualifying streamline, VA IRRRL refinance transactions, and NexBank's Reduced Doc (NR51 and NR71) product. On all loan programs where tax returns are used to document qualifying income the tax returns must be signed and dated.

Tax transcripts obtained from the IRS must match the tax returns provided by the borrower. For tax returns with amendments, refer to the Amended Tax Returns section of this policy.

Where applicable, a transcript is required for all borrowers on the loan, even if the borrower has no qualifying income. These transcripts must be dated prior to the loan closing date and must be analyzed by the Underwriter as part of the approval process, prior to the Underwriting Final Approval/Clear to Close being issued, in order to validate the borrower(s) income.

NOTE: NexBank will order transcripts for all loans, for the programs required, submitted through the wholesale brokered channel. Non-delegated Third Party Originators (TPO), approved through the correspondent channel, will provide the processed transcripts as part of the underwriting process.

B. Tax Transcript Requirements

Fannie Mae and Freddie Mac Loans

Tax transcripts are not required for Fannie Mae and Freddie Mac when all qualifying income is W-2 income and/or fixed income typically reported on a 1099. Otherwise, tax transcripts are required for each tax year with qualifying income documentation. If not yet available, IRS or vendor document showing that no transcript is available is required.

For loans in which tax transcripts are required:

? Include One Year IRS Tax Transcript (most recent year) when Automated Underwriting Feedback requires one year of income documentation.

? Include Two Years IRS Tax Transcripts (most recent consecutive two years) when AUS feedback or agency guidelines require to years of income documentation.

All Other Loan Types

When tax transcripts are required by the program type, request 1040 Transcripts for the most recent two years. W2 transcripts in lieu of 1040 transcripts will not be acceptable.

1. When Previous Year's Transcripts Are Not Yet Available In cases where transcripts are not yet available from the IRS, the transcript request will reflect "No Record Found" for the period requested. If the tax returns are not yet due, lenders should request the most recent available transcripts. When tax returns are due, NexBank will require the transcripts for the previous year on the first day following the tax filing deadline for all loans closing after the IRS tax filing deadline. For example, the tax filing deadline for TY2021 is April 15, 2022, and all loans closing after April 15, 2022 will require a tax transcript for 2021 taxes. A TY2021 "No Record of Return" is acceptable until eight (8) weeks after April 15, 2022.

In other cases where the transcripts are unable to be processed, such as cases of previous identity theft:

Tax Transcript Guidelines

Revised 08/12/2021

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? The determination from the IRS that the request could not be processed must be included in the file; AND

? Transcripts must be requested and provided by the borrower. NOTE: When the borrower provided transcripts are utilized, the file must include the IRS determination message (unable to process) from the attempt to order transcripts by third party in the file.

2. Documentation Requirements (when previous year's transcripts are not yet available) If the borrower has filed their most recent year tax returns, but the transcripts are not available, the income may be still used to qualify provided year over year increases are explained, the actual calculated income does not represent more than a 20% increase from the previously verified year (qualifying income may not be reduced from the actual "calculated income" in an effort to reflect less than 20%), and are documented as stable and credible. "Credible" means that the Underwriter has analyzed the nature and location of the borrower's employment, including the borrower's position in the company and the size of the company, and concluded that the income is realistic. If the tax transcripts for the most recent year are not yet available, the previous number of years of tax transcripts as required by the AUS or policy (reflecting results) are required. For loans requiring 2 years tax returns/verified tax transcripts, there would be a total of three years processed tax transcripts, with the most recent year reflecting "No Record Found." For loans requiring 1 year tax returns/verified transcripts, there would be a total of two years processed tax transcripts, with the most recent year reflecting "No Record Found."

For example, if the AUS requires 2 years tax returns and 2021 and 2020 Tax Returns have been provided, however the 2021 tax transcript reflects "No Record Found", then in addition to 2021/2020 transcripts, the 2019 Transcripts will be required to satisfy the 2 year AUS requirement for tax returns which have validated transcripts available.

NOTE: While the qualifying income may not be reduced from the actual "calculated income" in an effort to reflect less than 20% increase year over year, if the borrower can qualify on the most recently validated tax return year (2020 from the example above), that income may be calculated solely on the most recently validated tax year.

3. Verifying IRS Tax Refunds or Payments In addition to the income documentation (described above under Documentation Requirements)for selfemployed and W-2 borrowers, one of the following tax validation requirements must be completed when taxes have been filed, but the tax transcripts are not yet available.

? If the borrower is entitled to a refund, the refund amount must be verified by the IRS. The IRS can be contacted through or the IRS Teletax System by calling 1-800-829-4477, entering the social security number, filing status, and refund amount in whole dollars. For W-2 employees, when tax returns are not required, the borrower may provide a letter of explanation identifying the social security number, filing status, and refund amount. As long as the social security number, filing status, and refund amount matches the Teletax System, the feedback will verify the refund amount and provide the date the refund was processed.

? If the borrower owes taxes, the cancelled check to the IRS must be provided and must match the amount due on the tax return. If tax returns are not required, then the canceled check will suffice.

C. General Requirements for All Programs

1. Taxes Owed For the Most Recent Year

Separate from the requirement for tax transcripts or alternatives to tax transcripts, when tax returns have been provided, even if not required for qualifying, an assessment of the amount owed must be completed. If the tax returns were filed prior to the most recent bank statement verification period and prior to application, no further action is necessary. If the tax returns were filed during the bank statement period verified or after the application date, evidence of payment of the taxes must be verified by a canceled check, ACH draft to the

Tax Transcript Guidelines

Revised 08/12/2021

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IRS or backed out of the assets, if sufficient assets are available. If a payment arrangement has been made, evidence of the payment arrangement as well as proof the first payment has been made must be provided. The payment must be included in the borrower's DTI. For loans in which a VOD is provided, the "bank statement period" is considered within the last 60 days prior to the date of the VOD.

For Example, if the borrower filed their TY2021 tax returns on August 15th, 2022 and the bank statements provided are dated August 1st through September 30th, then the tax returns were filed during the bank statement period provided and evidence of payment of taxes owed must be verified OR backed out of the assets, if sufficient assets are available.

Alternatively, if the borrower filed their TY2021 tax returns on August 15th, 2022 and the bank statements provided are dated September 1st through October 31st, then the tax returns were filed prior to the bank statement period provided and evidence of the taxes owed being paid is not required.

NOTE: If the amount of taxes owed is significant in comparison to the borrower's income/assets, the underwriter may require evidence the taxes have been paid in order to verify that a payment arrangement was not required and there is not a debt which must be included in the qualifying ratios.

2. Tax Extensions for Previous Year's Tax Return

When tax returns are required and the borrower filed an extension, a copy of IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), cancelled check to the IRS or credit card statement reflecting payment of anticipated tax obligations, and tax transcripts confirming "No Record Found" for the most recent year for which extension was filed, must be provided. Additionally, the previous year's available tax transcripts must be provided. For example where AUS only requires 1 year of tax returns: If an acceptable extension was filed for TY2021, the file should then contain IRS form 4868, a copy of the cancelled check for any anticipated taxes due, the 2020 1040's and tax transcripts for TY2021 (reflecting No Record Found) and 2020 (reflecting matching results).

Extensions for the previous year's tax return must have been filed no later than the IRS published due dates for tax returns. For example: A TY2021 "No Record of Return" is acceptable until eight (8) weeks after October 15, 2022. Regardless of the extension filing, the most current validated transcripts are still required.

3. Amended Tax Returns

"Amended" tax returns must have been filed not less than sixty (60) days prior to the date of the purchase agreement or mortgage application, whichever is later. Amended tax returns must be posted by the IRS and available for validation if the amended tax return was filed sixty (60) days prior to the purchase agreement or mortgage application as stated above.

4. Unfiled Federal Income Tax Returns

If tax returns have not been filed by the IRS published due date and an extension was not filed, the income provided by the borrower is not verifiable and the income will not be considered in the qualification of the borrower.

5. Guidance for Analyzing Tax Transcripts

Processed tax transcripts must support income amounts submitted. Generally, if a borrower has not filed tax returns, the income provided by the borrower is not verifiable and, therefore, is not acceptable as "income"to be used to qualify the borrower for the loan application.

6. Comparing W-2s to IRS Transcripts

Compare the W-2 wages to the "Wages, Salaries, and Tips" section on the IRS Transcript. Transcripts that show lesser earnings than the W-2, AND amended returns cannot be provided, do not validate income. The loan is ineligible for underwriting approval.

Tax Transcript Guidelines

Revised 08/12/2021

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7. Comparing YTD Paystubs and Written VOEs to IRS Transcripts

When comparing YTD paystubs and written VOEs to IRS transcripts, compare the "Wages, Salaries, and Tips" section on the IRS Transcript to the borrower's income as reported on the paystubs or written verification of employment.

NOTE: There may be a discrepancy between the two documents due to 401k contributions or other deductions elected by the borrower which would reduce the taxable income. An analysis should be completed by the underwriter to determine credibility of the income utilized on the paystubs and/or written VOE's.

8. Business Tax Transcripts

NexBank does not require the processing of business tax transcripts for any business type, regardless if the income derived from a borrower's self-employed business is being utilized to qualify or not. However, a completed and executed IRS form 4506-C (09-2020) is required. (See Instructions for completingthe 4506-C on page two of the 4506-C form(s).)

NOTE: All previous 4506-T versions have been replaced by the new IRS from 4506-C

9. Completion of 4506-C for Business Income

IRS form 4506-C (09-2020) must be signed (but not processed) for each business, for the required number of years of income documentation when:

? Desktop Underwriter (DU) requires business tax returns, and income from the business is being used to qualify.

? Any time Loan Prospector (LP) has been used to decision the loan, regardless if the business income is utilized or not.

? Using business tax returns to offset a loss on personal tax returns

NOTE: All previous 4506-T versions have been replaced by the new IRS from 4506-C.

D. Disclaimer

As always, NexBank reserves the right to request additional documentation or clarification as deemed necessary on any individual file.

Tax Transcript Guidelines

Revised 08/12/2021

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