Why Lenders Need Your Tax Returns
Your tax returns tell the complete story of your income in a way that pay stubs and employment letters cannot. While a pay stub shows what you earned last month, your tax returns reveal patterns over entire years. They show whether your income is stable, growing, or declining. They also capture income sources that might not appear on a W-2, like rental properties, side businesses, or investment earnings.
Say you work in sales and earn a $50,000 base salary plus commissions. Your recent pay stubs might show $8,000 per month, but your tax returns reveal that your commission income dropped 30% last year. The lender needs this context to determine whether your current income level is sustainable.
Fannie Mae requires tax returns for specific situations because these income types carry higher risk or complexity. Self-employed borrowers, rental property owners, and people with significant investment income all must provide tax returns regardless of their other documentation.
What Counts as an Acceptable Tax Return
Your tax return must be the actual signed copy you filed with the IRS. A draft prepared by your accountant but never submitted does not qualify. The return must include every schedule and form that was part of your filing - Schedule C for business income, Schedule E for rental income, all W-2s, 1099s, and K-1s.
If you filed electronically, you can provide Form 8879 (the IRS e-file signature authorization) instead of a signed paper return. This form proves you authorized the electronic filing and serves as your signature.
Tax transcripts from the IRS can substitute for unsigned tax returns, but only if they contain enough detail for the lender to verify your income. Individual rental property details often do not appear clearly on transcripts, so you might still need the actual return.
Timing Requirements That Can Complicate Your Loan
The age of your tax returns depends on when you apply for the loan and when it closes. For applications received before April 15, 2025, your most recent tax return cannot be older than 2023. After April 15, the requirements become more complex.
If you apply after April 15, 2025, but have not yet filed your 2024 tax return, you need to provide specific documentation. The lender must obtain IRS confirmation that your 2024 tax transcript is not yet available. You also need evidence of any filing extensions you requested, such as Form 4868 for individual returns or Form 7004 for business returns.
Here's where timing gets tricky: if your loan closes on or after May 31, 2025, your most recent tax return cannot be older than 2024, regardless of extensions or other factors. This means you might need to file your 2024 return earlier than planned to meet the loan requirements.
When Tax Returns Are Always Required
Certain income types automatically trigger the tax return requirement, even if you have other strong documentation. Self-employed borrowers must provide tax returns regardless of bank statements or profit-and-loss statements they might have. The same applies to rental income, even if you have lease agreements and bank deposits.
Commission income, bonus income, and tip income all require tax returns to establish a history and calculate an average. If commissions represent a significant portion of your income, the lender will average your last two years of commission earnings from your tax returns.
Income from family members or parties to the transaction always requires tax returns. This includes situations where you work for a family business or the home seller employs you. Fannie Mae views these arrangements as higher risk and requires the additional documentation.
The IRS Transcript Alternative
IRS tax transcripts can sometimes replace your actual tax returns, but they have limitations. A transcript shows the key numbers from your return - total income, adjusted gross income, taxes paid - but lacks the detail found in schedules and supporting forms.
For a W-2 employee with straightforward income, a transcript might provide sufficient information. For someone with rental properties, business income, or complex investments, the transcript typically lacks the detail the underwriter needs.
You can request transcripts directly from the IRS or authorize your lender to obtain them. The process takes several days, so plan accordingly if you choose this route.
Common Problems That Delay Approval
Missing schedules cause frequent delays. If your tax return references Schedule C, Schedule E, or any other form, the lender needs to see it. A summary page showing business income is not enough - they need the complete Schedule C with all its detail.
Amended returns create complications. If you filed an amended return (Form 1040X), provide both the original return and the amendment. The lender needs to understand what changed and why.
Unsigned returns are another common issue. If you cannot locate your signed copy, you have several options: obtain IRS transcripts, provide Form 8879 if you filed electronically, or complete Form 4506-C to authorize transcript release.
Business owners face additional complexity when their most recent business tax return is not yet available. Alternative documentation might include recent profit-and-loss statements, bank statements, or confirmation from your tax preparer that the return has not been filed.
Understanding the Taxpayer First Act Requirements
Recent changes require your explicit consent before lenders can use and share your tax information with mortgage investors and servicers. This consent must be broad enough to cover all potential owners of your loan and their service providers.
The consent form must be signed and placed in your loan file. Your lender should handle this process, but understand that it is a required step that could delay your loan if not completed properly.
References
For the official guidelines, see 5302.4: Tax returns and tax return information: Documentation and verification requirements in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains information related to:
Age of tax return requirements
Internal Revenue Service (IRS) tax transcripts
When tax returns are required
Unreimbursed employee expenses reported on tax returns
Under certain circumstances, the Taxpayer First Act requires that the taxpayer’s consent be obtained prior to the use and disclosure of the taxpayer’s tax return or tax return information to a third party. If taxpayer consent is required under the Act, Sellers must ensure that the form of consent obtained from the taxpayer permits the use and sharing of the tax return or tax return information with and by any actual or potential owners of the Mortgage, as well as their service providers, successors and assigns. The signed consent form must be obtained in a timely manner and placed in the Mortgage file in accordance with
Section 3301.1(b)
.
(a)
Tax returns must be:
The Borrower's signed copy of the U.S. federal income tax return(s) that were most recently filed with the Internal Revenue Service (IRS)
A complete tax return, including all applicable schedules and forms (which includes all W-2s, K-1s and 1099s)
The following are acceptable alternatives for the Borrower’s signature on the tax return(s):
Evidence the tax returns were filed electronically (e.g., signed Form 8879, IRS e-file Signature Authorization or equivalent), or
Tax transcripts that validate the information on the unsigned tax returns, or
A completed IRS Form 4506-C signed by the Borrower, or alternate form acceptable to the IRS that authorizes the release of comparable tax information to a third party
(b)
Age of tax return requirements
The most recent federal income tax return is the last tax return, individual and/or business, that was filed with the IRS by the Borrower and, if applicable, the Borrower’s business. Sellers are encouraged to always confirm with the Borrower that the tax returns provided are the tax returns most recently filed with the IRS.
The Seller must determine the stable monthly income which may require additional documentation and analysis. Refer to
Section 5304.1(g)
for additional guidance about self-employed income and supporting documentation when the tax returns for the most recent calendar year are not yet available.
At a minimum, the following date and documentation requirements must be met, based on the Application Received Date and the Note Date for the Mortgage:
(i)
For Mortgages with Note Dates on or after November 1, 2024
Note Date
Age of tax return and other documentation requirements
Before:
On or after:
Before:
May 31, 2025
Most recent federal income tax return(s) filed with the IRS
The most recent tax return(s) must be no older than 2023
On or after:
Before:
May 31, 2025
If the Borrower has not filed the 2024 tax return(s) with the IRS:
The most recent tax returns must be no older than 2023
The Seller must obtain:
IRS confirmation verifying tax transcript(s) are not yet available for the tax return(s) (individual, and business, if applicable) from the 2024 tax year
1,2
; and
Evidence of completed IRS tax filing extension(s) for the 2024 tax year (e.g., if using IRS tax extension forms to evidence tax filing extension, include IRS Form(s) 4868 and/or 7004, as applicable)
3
;
On or after:
Before:
On or after:
November 1, 2025
The most recent tax return(s) must be no older than 2024, regardless of other factors such as tax filing extension status or IRS tax filing deadline relief status
1
If the IRS extends the tax filing due date, the IRS confirmation is required for Mortgages with Application Received Dates on or after the IRS income tax filing due date, or May 31, 2025, whichever occurs first; and Note Dates on or after the last day of the month following the IRS income tax filing due date, or June 30, 2025, whichever occurs first.
2
Alternative documentation is acceptable in lieu of the IRS confirmation that tax transcript(s) are not yet available for the business tax return(s), as follows:
Confirmation business tax returns were filed after IRS filing due date for the prior year(s) (e.g., 2023 business tax return in file was signed later in the year (e.g., October)) or documentation from third-party tax return preparer confirming 2024 business return has not yet been filed; and
Documented evidence of continued income stability using at least one of the examples listed in
Section 5304.1(g)
in the row labeled “Business and/or individual tax return(s) - most recent calendar year not yet available”
3
If the IRS extends the tax filing due date, evidence of the completed IRS tax filing extension is required for Mortgages with Application Received Dates on or after the IRS income tax filing due date and Note Dates on or after the last day of the month following the IRS income tax filing due date.
(ii)
For Mortgages with Note Dates before November 1, 2024 and Settlement Dates on or after February 5, 2025
Apply the age of tax return and other documentation requirements as shown in the table in
Section 5302.4(b)(i)
; however, the prior calendar year may replace the calendar year shown in the table.
(c)
IRS tax transcripts
If a tax transcript is obtained and contains information sufficient to meet verification requirements in
Topic 5300
, it may be used in lieu of other required documentation (e.g., IRS Form W-2); however, the information provided on the tax transcript often lacks certain information needed to fully evaluate the stable monthly income.
Example: Individual rental property data, partnership and S corporation information is not clearly delineated in the tax transcripts. Conversely, the sole proprietorship information for Schedule C that is contained in a tax transcript may be an effective documentation alternative when reviewing the impact of a business loss incurred by self-employment.
IRS confirmation verifying transcripts are not yet available for the prior calendar year are always recommended, and in certain instances are required. Refer to
Section 5302.4(b)
for additional information about age of tax return requirements.
(d)
When tax returns are required
The Seller must obtain the Borrower’s most recent federal income tax return(s) for certain types of income and/or employment characteristics if using the income to qualify the Borrower. Links to the topic specific requirements are provided in the table below.
When tax returns are required
Income types and/or employment characteristics
Guide location
Tip income – Cash and charge tips reported on IRS Form 4137
Section 5303.1(d)(ii)
Income from employment by a family member, property seller, broker or other interested party to the transaction
Section 5303.1(e)
Income reported on IRS Form 1099 for services performed
,
Section 5305.1
Non-employment/non-self-employment income from a foreign source
(e)
Unreimbursed employee expenses reported on tax returns
Unreimbursed employee expenses reported on the Borrower’s federal individual income tax returns are not required to be deducted from the Borrower’s income.
