Copies of the last 2 years of Tax returns are one of the items on a lender’s checklist of things a buyer must provide to get loan approval. If you filed an Extension in April then your taxes are now due by October 15th. If you are trying to buy a home right now with a loan then the lender’s underwriter will be asking for proof that you filed and paid your taxes. They will ask for a copy of your filed extension and then proof from the IRS that you did file and paid your taxes. This will be a condition for loan approval! Your loan approval will be delayed until the IRS responds. Generally, it can take from 2 to 4 to 6 weeks for the IRS to respond, BUT the Federal Government is now in shutdown as of Oct 1 so expect that response from the IRS to take even longer.
Okay now lets talk about how to minimize the impact of your tax extension on your loan approval.
- First and Always: It’s important to talk about a strategy with your lender, they may want you to handle it a specific way, it’s important to always discuss your financial situation with your loan officer.
- A Potentially Quick Solution: If you haven’t filed yet then take your return and payment down to a the IRS office in your city. They can time stamp it and give you a receipt for the tax return. This may be good enough for the lender’s underwriter and will keep your loan approval moving forward. (Discuss this with your lender and your tax professional.)
- File a Form 4506-T with the IRS to get copies of your tax transcript from the IRS. There is no fee for this. As I said before this can take weeks for the IRS to respond.
An extension will always be a speed bump in the mortgage approval process no matter what time of year you are applying for a loan. There are two times of the year where it is an even bigger bump, April and October. This is because the IRS is already busy handling the tax rush so there tends to be a longer delay in their response to form 4506-T. You can lessen the bump/problem by being prepared and telling you lender upfront that you are filing an extension or have recently filed an extension. This is another reason why I recommend that you work with a local lender rather than an online lending company. It’s in your best interest to have a face-to-face relationship with a lender who knows specifically about the home purchase process and pitfalls in your state. The laws, practices and contracts related to purchasing a home is governed by each individual state.
So why is this a big deal for you? In Colorado, if a seller has accepted your offer on their home then you are under contract. The contract has a set dates and deadlines that keep the process moving forward and also offer you, the buyer, some protection to get out of the contract and get your earnest money back but you must follow those deadlines. This is one area where it is good to have a knowledgeable and experienced realtor working for you, they will work with you and advise you on the best time frames for these deadlines. The lender is not party to this contract but can certainly affect you ability to buy a home. The deadline that I am specifically speaking about is the CLOSING DATE. In other words you and the seller have agreed on a date to sign all the paperwork and transfer funds and transfer ownership. So if the underwrite is waiting to give final loan approval on your loan because they haven’t heard from the IRS you could lose the opportunity to buy the house you want and also possibly lose your earnest money. If your real estate agent knows about this issue in advance then they can ask the Seller to sign an Amend/Extend to the contract moving the closing date and possibly the loan objection deadline further out. BUT the seller must agree to this and they may not be willing to move the dates. In this particular market where there a many buyers and not too many homes on the market it’s common to see the seller not agree to extend the closing date because they know that they can sell it to someone else and maybe for more money or better terms than you negotiated. In slower markets where there are not many buyers and lots of homes on the market the sellers have been more willing to delay closing.
You can see why it may be best to start getting the transcript from the IRS before you even go under contract and why it’s recommended that you start the loan approval process with a lender before you even look at the first house.
Bottom line: Talk to your lender and your realtor, let them know about your situation and any foreseeable issues. The more time they have to react the smoother the home purchase process can go and the better job they can do for you.