What happens if a tax transcript is not available when you apply for a mortgage?
In short, lenders use tax transcripts to confirm that the tax documents you submitted to the lender are the same documents that you submitted to the IRS. This enables the lender to verify your past income while also helping them reduce mortgage fraud. When you apply for a mortgage you are usually required to submit a 4506-t form that enables the lender to access your tax transcripts for the prior three years. Please note that a tax transcript is a summary of your tax returns but not the actual return document, a copy of which you are also usually required to provide the lender. If reviewing your tax transcripts is a condition to approving your mortgage, then not having a transcript for a required year could create an issue.
The magnitude of the issue and if you can overcome it depends on the reason why the tax transcript is unavailable. If the transcript is missing because you did not file your taxes, most lenders require you to bring your taxes current before you can qualify for a mortgage. If the transcript does not exist due to a technical glitch but you actually filed your taxes, then you may be able resolve the issue with the lender. For example, in some cases you file and pay your taxes on time but your tax documents are not officially accepted by the IRS (although they usually accept your money). Perhaps you were missing a form or document required by the IRS.
In this scenario, your actual tax documents, even though they have not been officially accepted by the IRS, and letter of explanation may be sufficient to satisfy the specific lender requirement. If you can provide tax and income documents that include the same information that would be on a tax transcript then you may be able to fulfill the lender's underwriting guideline and the lender may approve your mortgage.
My recommendation is that you notify the lender of the reason the tax transcript is not available and offer to provide all of your tax documents for that year including your tax return and W-2s, if applicable. It may also be helpful to provide a letter of explanation that outlines why your transcript is not available. The letter of explanation should be factual and to the point and summarize the steps you took to resolve the issue. You should also note that you have no outstanding back taxes or tax liens and that the issue was procedural or technical and not financial in nature.
Please note that tax liens or paying back taxes do not automatically prevent you from qualifying for a mortgage as long as you are current on your payments and the lender is aware of the items so they can factor them into your loan application. Problems only arise when lenders are unaware of the tax issue or learn that you may be required to start paying back taxes over the course of the mortgage application process.
If your transcript is not available because you failed to properly file your taxes, then I advise you to resolve any open issues before you apply for the mortgage. Having your taxes and transcripts in order is the best way to position yourself to get approved for your loan.
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