Home Mortgage Documentation

[Roberta]

Jurisdiction

Alabama

My ex-business partner is buying a home and the mortgage broker is requesting our business tax returns but will not give an explanation, just a demand. I have never had to furnish tax returns from my employer for a loan, so am confused as to what information he is seeking. He does not answer questions, just re-iterates the information he wants. First, our business is no longer in operation. The business was a LLC ran as a S Corporation. I think W-2's would provide the needed income verification. All the corporate tax return shows is the business income and expenses and not the distribution between us. I am concerned that this broker is not being honest and, therefore, I am hesitant to release this information. Is this a legitimate request? Why is this information needed? Thanks for any help with this.

 

[adjusterjack]

the mortgage broker is requesting our business tax returns but will not give an explanation, just a demand

Whatever explanation you think you need beyond "verification of income" the broker has no obligation to provide.

When you apply for a mortgage you provide what the lender wants or you don't get the money. For a self employed person the income verification is much more rigorous than just the W-2s.

Is this a legitimate request?

Yes.

Why is this information needed?

Income verification.

I am concerned that this broker is not being honest

And I'm concerned that you have something to hide. See how that works. Making assumptions with no evidence.

Anyway, your former associate has as much right to those records as you do and you risk getting sued if you interfere with his ability to get a mortgage.

 

[Tax Counsel]

All the corporate tax return shows is the business income and expenses and not the distribution between us.

The Form 1120-S that the S-corporation files includes the Schedules K-1 for each shareholder (member) of the S-corporation, and the Schedules K-1 do show the share of income and distributions to each shareholder.

Is this a legitimate request? Why is this information needed? Thanks for any help with this.

If you hold a significant interest in that LLC and are relying on the income from the LLC to qualify for the loan then a lender will want to see how the LLC is doing since if the LLC ends up doing poorly and your income goes down you'll be unable to pay the mortgage. After all, you're not just an employee of some long established independent business where you might expect to get a steady salary. You're the owner of a business, and it is the business income that is funding the loan. The W-2s alone wouldn't be good enough in that situation since (1) the pay depends on how the company does and (2) since you are a major member of the LLC, you could potentially manipulate your salary to make your income look better than it really is. So when you are effectively self employed, most lenders will want to see the information on business you are running to ensure that there will be a good source of income to pay the loan. Nothing about this request seems shady to me.

By the way, your ex partner (member) of the LLC can go ahead and get copies of the returns from the IRS anyway. So you refusing to help him in the end won't stop that information from getting to the lender. If you are concerned about your info going to the lender, provide a copy of the return to your partner that has your name, SSN, and address blacked out on the K-1 and other schedules on which that information appears.

 

[Roberta]

The Form 1120-S that the S-corporation files includes the Schedules K-1 for each shareholder (member) of the S-corporation, and the Schedules K-1 do show the share of income and distributions to each shareholder.



If you hold a significant interest in that LLC and are relying on the income from the LLC to qualify for the loan then a lender will want to see how the LLC is doing since if the LLC ends up doing poorly and your income goes down you'll be unable to pay the mortgage. After all, you're not just an employee of some long established independent business where you might expect to get a steady salary. You're the owner of a business, and it is the business income that is funding the loan. The W-2s alone wouldn't be good enough in that situation since (1) the pay depends on how the company does and (2) since you are a major member of the LLC, you could potentially manipulate your salary to make your income look better than it really is. So when you are effectively self employed, most lenders will want to see the information on business you are running to ensure that there will be a good source of income to pay the loan. Nothing about this request seems shady to me.

By the way, your ex partner (member) of the LLC can go ahead and get copies of the returns from the IRS anyway. So you refusing to help him in the end won't stop that information from getting to the lender. If you are concerned about your info going to the lender, provide a copy of the return to your partner that has your name, SSN, and address blacked out on the K-1 and other schedules on which that information appears.

Interesting, thanks for the information. This is a business that went out of business and we poured lots of money into just to lose money. It is interesting that it's important to verify a net loss of a business that went out of business. I would think that is why most businesses cease to be. Guess, I will verify the obvious. Thanks, again.

 

[zddoodah]

Is this a legitimate request?

How exactly could anyone here have any better insight into the motivations of this unknown mortgage broker than you have?

Why is this information needed?

I could probably come up with half a dozen hypothetical reasons why.

At the end of the day, however, I'm not sure what this has to do with you. Is your former "partner" (i.e., co-member of the LLC) unable to provide this documentation without your involvement?