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Don't grant lenders unlimited access to tax records

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POSTED February 7, 2013 5:25 p.m.

DEAR BENNY: I understand that when homebuyers sign closing documents, they are routinely required to sign a blanket form allowing the lender to access IRS records with no time limit. The form says not to sign it unless dates are specified on the form, but lenders routinely insist they be signed without any specification as to which years of IRS records are covered.

When I have objected, the lender has told me to either sign the form as is or forget about getting a loan. I think this is an outrageous practice and wonder if there are any restrictions on lenders being able to do this. --Barbara

DEAR BARBARA: I personally object to the requirement that lenders impose on potential buyers that they sign IRS Form 4506 authorizing the lender to access the borrower's tax return from the IRS for possibly an unlimited number of years into the future.

Lenders understandably want to make sure that the information they receive from their potential borrowers is accurate, including the tax returns that the borrower gives the lender during the loan application. Accordingly, lenders want the right to do their own search by asking the IRS to provide those returns. And the IRS will not release anyone's tax return unless they receive a signed Form 4506.

I seriously doubt that lenders routinely order tax returns from the IRS. In one situation I had, the lender believed that my client had falsified his loan application (including the tax return he submitted with that application). However, after obtaining the return from the IRS, the lender was satisfied that there was no such fraud.

Let me provide you with a little secret, which lenders will not like. If you want the loan, you have to sign the form. And as Barbara points out, you are not to sign that form unless dates are specified. So, fill in the date -- if you gave your lender your 2010 and 2011 tax returns, use those dates. At least the lender will not be able to go on a fishing expedition for future years.

DEAR BENNY: My wife and I own a second home located two miles from our primary residence, and we want to refinance and move into that house. We qualify with the income and credit, but were told verbally we had been turned down on account that the underwriter does not believe we will move into the house. I have written two letters stating we will move, etc.

I have asked what evidence we need to produce to the underwriter to convince them we are going to move in after the property is refinanced. They are not responding at all. I have already paid for the appraisal and my credit report.

By law, don't they need to tell us why we were turned down and/or tell us what evidence is needed to convince them we are moving after the refinance? --Scott

DEAR SCOTT: You are correct. By law, if a lender turns down a loan application, the borrower must receive a written explanation providing the reason for the rejection. However, all too often, the explanation is vague. If you do not understand -- or agree -- with the rejection, go back and demand (in writing) a better explanation from the lender.

Unfortunately, I do not believe that lenders have to provide you with what evidence you will need to move forward with the loan (purchase or refinance). However, many lenders who want your business may be willing to assist.

You are seeking a refinance of your existing mortgage. As you no doubt know, lenders are giving everyone -- and especially those wanting to refinance -- a very difficult time. Loan guidelines have toughened up, and the appraisal process is completely messed up because lenders now have to rely on an appraiser who may not even know or live in the neighborhood where the house is located.

You cannot force the lender to make you the loan. Have you personally talked with a top manager at the loan office? And you may want to suggest that they are violating federal law by not providing you with a written explanation as to your denial. Perhaps that threat will assist them in changing their mind.

For more information, search "Fair Credit Reporting Act" on the Web.

DEAR BENNY: I am currently renting out my one-bedroom condo for $875 a month; the mortgage payment is $865 a month. I also pay $185 a month for the homeowners association bill. So right off the bat I am losing money. I am able to do the $185 a month as a loss on taxes so it's not that bad.

I owe $99,000 on the condo and another $11,000 on a home equity loan that's stuck on that condo when it sells. The market thinks the condo is worth about $108,000 or less; I've tried calling my bank with the home equity loan, and I have tried calling the first mortgage lender for help.

I own a new house, and asked my new lender if I can move that home equity loan off the condo to my new house, to no avail.

Can I walk away from this condo and still collect rent from my renter? What happens with my home equity loan if I stop paying the mortgage? --Dan

DEAR DAN: My answer must be general, because state laws differ in this area. Some states allow lenders to go after what is known as a deficiency judgment (namely, the difference between what the property sells for at a foreclosure sale and what is owed), and other states do not allow lenders to go after the deficiency if they foreclose on your property.

More importantly, you have to understand that when you borrowed the money to buy your condo (and your house) you signed two important documents: the promissory note (I owe the bank XX dollars) and the mortgage (also called a deed of trust).

Your lender can foreclose under the mortgage document; but it can also sue you under the terms and conditions of the promissory note you signed. So if you stop payment, your first lender can foreclose. That would wipe out the home equity deed of trust but would not eliminate your legal obligation to pay the home equity loan based on the promissory note you signed.

Bottom line: Talk to your condo loan company about a short sale. You may want to engage a real estate broker who has experience with short sales and go that route.

Regardless, you have to talk with an attorney in your state about your specific situation.

DEAR BENNY: Is there a difference between an "escrow settlement" and a "house (or condo) closing"? --Terri

DEAR TERRI: For all practical purposes, there is no difference. Most Western states use the concept "escrow closing," while in other parts of the country is it called a "settlement" or "house closing."

In both situations, the seller gives the escrow agent (or settlement agent or title attorney) the deed to the property, which is held in escrow with all other related settlement documents needed to be signed by the seller. When the buyer signs all of the loan documents and presents the agent with a check for the balance of the closing and settlement costs -- and the lender funds the loan -- the agent then records the deed and disburses the money as required in the HUD-1 (settlement statement).

So the bottom line: There is no difference, just a matter of terminology and geography.

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