How Many Years of Tax Returns for Mortgage?

When applying for a mortgage, providing tax returns is a standard part of the process. Lenders use these documents to get a verified, comprehensive look at your financial history and income stability over time. This financial vetting is a core component of a lender’s risk assessment, as it helps them determine your ability to consistently make mortgage payments over the life of the loan. The information contained within your tax filings offers a detailed narrative of your earnings that pay stubs or bank statements alone cannot provide.

Standard Tax Return Requirements for Mortgage Approval

For most mortgage applicants, the standard requirement is to provide the two most recent years of signed, personal federal tax returns. This two-year lookback period has become the industry norm because it gives lenders a clear view of your recent income history and its consistency. The primary document requested is your Form 1040, which summarizes your income from all sources for the year. This requirement applies to all borrowers, including those with traditional W-2 employment.

Accompanying your Form 1040, you will need to provide all supporting schedules and forms that were filed with it. For a typical W-2 wage earner, this includes copies of your W-2 forms from each employer for those two years. If you received other types of income, such as from freelance work or investments, you would also include any corresponding 1099 forms.

While two years is the standard, there can be exceptions. A lender might, in some cases, only require one year of tax returns for a W-2 employee with a long and stable job history at the same company. However, these situations are less common, and it is always best to prepare for the two-year requirement.

Lender Analysis of Your Tax Returns

When underwriters review your tax returns, they are looking for a stable and reliable income stream capable of supporting the mortgage payments. Their analysis often begins with your Adjusted Gross Income (AGI), which serves as a baseline for calculating your qualifying income, as it accounts for various income sources like wages, dividends, and business income, minus certain deductions such as student loan interest or retirement contributions.

Lenders analyze your income trends over the two-year period. They want to see that your earnings are either stable or increasing, as this indicates financial reliability. A significant, unexplained decrease in income from one year to the next can be a concern and will likely require a detailed letter of explanation.

Underwriters also distinguish between recurring and non-recurring income. For example, a large, one-time capital gain from selling stock will likely be discounted or excluded from your qualifying income because it is not a reliable, ongoing source of funds.

Documentation for Self-Employed and Non-Traditional Income Earners

Borrowers who are self-employed, independent contractors, or small business owners face more extensive documentation requirements. Lenders consider anyone who owns 25% or more of a business or receives 1099 income to be self-employed. These applicants must also provide their two most recent personal tax returns (Form 1040), but they must include all business-related schedules to substantiate their earnings.

The specific forms required depend on the business structure:

• Schedule C, which details business profit or loss for a sole proprietor.
• Schedule K-1, which reports an individual’s share of the company’s income.
• Form 1065 for partnerships or Form 1120-S for S-corporations.
• Schedule E for rental income.

Lenders calculate qualifying income for self-employed borrowers by averaging the net income from the business over the past 24 months. Underwriters will often make adjustments by adding back certain non-cash expenses that were deducted on the tax return. These “add-backs” can include expenses like depreciation, which is a paper expense that reduces taxable income but doesn’t represent an actual cash outlay, giving a more accurate picture of the borrower’s true cash flow.

Preparing Your Tax Documents for Submission

If you do not have copies of your past tax returns, you can obtain them directly from the Internal Revenue Service. The IRS offers a “Get Transcript” service on its website, which allows you to immediately view, print, or download transcripts of your tax returns from previous years for free. You can also request them by mail, though this takes longer.

Your lender will ask you to sign IRS Form 4506-C, IVES Request for Transcript of Tax Return. This form gives your lender explicit permission to request your tax transcripts directly from the IRS. This is a standard quality control measure that allows the lender to verify that the documents you provided are authentic and match what the IRS has on file.

It is important to fill out Form 4506-C completely and accurately, ensuring the name and address match your tax filings exactly to avoid rejections and delays.