Selling Guide

Published June 02, 2021

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When are tax returns required to document income?

Determining the Need for Federal Income Tax Returns

The lender must obtain copies of the borrower’s signed federal income tax returns filed with the IRS for the past one or two years (depending on the income type) for the following sources of income or employment. Refer to the applicable topics in Chapter B3-3, Income Assessment for additional information about specific tax return requirements. 

Tax returns are required if the borrower

  • is employed by family members (two years' returns); 
  • is employed by interested parties to the property sale or purchase (two years’ returns);
  • receives rental income from an investment property;
  • receives income from temporary or periodic employment (or unemployment) or employment that is subject to time limits, such as a contract employee or a tradesman;
  • receives income from capital gains, royalties, or other miscellaneous non-employment earnings reported on IRS Form 1099; 
  • receives income that cannot otherwise be verified by an independent and knowledgeable source (two years’ returns);
  • uses foreign income to qualify;
  • uses interest and dividend income to qualify; 
  • uses tip income reported on IRS Form 4137 that was not reported by the employer on the W-2 to qualify; or
  • receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest. Borrowers with a 25% or greater ownership interest are considered self-employed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers, as described in Section B3–3.2, Self-Employment Income. Note that for DU loan casefiles, only the most recent year of tax returns may be required.

If a borrower’s income is validated by the DU validation service, lenders are not required to determine if the borrower is employed by a family member or interested party to the property sale or purchase. See B3-2-02, DU Validation Service

See B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C, for information about obtaining tax return transcripts. 

For additional information, see B3-3.1-01, General Income Information.

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