Understanding Fannie Mae’s Requirements for Federal Tax Returns: Key Triggers and Exceptions

When it comes to mortgage applications, understanding the specific requirements set by Fannie Mae is crucial. One important aspect is the submission of federal tax returns. Here are the triggers that prompt Fannie Mae to request tax returns and explore various scenarios where they may not be necessary. Specifically, where the borrower works for a family member or an interested party, receives rental income from investment properties, relies on dividend and interest income for qualification, utilizes unemployment income, reports tip income on IRS form 4137, earns foreign income or has self-employed income with more than 25% ownership in a business entity. 

Borrower Works for a Family Member:

If the borrower works for a family member, Fannie Mae typically requires the submission of two years’ worth of federal tax returns. This is to ensure transparency and assess the borrower’s income stability. By reviewing tax returns, lenders can gain a comprehensive understanding of the borrower’s financial situation.

Borrower Works for an Interested Party to the Transaction:

Similar to the previous scenario, when the borrower works for an interested party involved in the mortgage transaction, Fannie Mae will typically request two years of federal tax returns. This requirement aims to prevent any potential conflicts of interest and ensure that the borrower’s income is accurately assessed.

Rental Income from Investment Properties:

If the borrower receives rental income from investment properties, Fannie Mae generally requires the submission of federal tax returns. This allows lenders to evaluate the stability and consistency of the rental income, which is an important factor in determining the borrower’s overall financial capacity.

Dividend and Interest Income:

In some cases, borrowers may rely on dividend and interest income to qualify for a mortgage. Fannie Mae typically requires the submission of federal tax returns to verify the consistency and reliability of this income source. By reviewing tax returns, lenders can assess the borrower’s ability to sustain the mortgage payments based on their dividend and interest earnings.

Unemployment Income:

Unemployment income can be used to qualify for a mortgage, but Fannie Mae usually requires the submission of federal tax returns to validate this income source. By reviewing tax returns, lenders can confirm the duration and stability of the unemployment income, ensuring that the borrower has a reliable source of funds to meet their mortgage obligations.

Tip Income Reported on IRS Form 4137:

If the borrower reports tip income on IRS Form 4137, Fannie Mae typically requires the submission of federal tax returns. This is done to verify the accuracy and consistency of the reported tip income. By reviewing tax returns, lenders can assess the borrower’s ability to sustain the mortgage payments based on their reported tip earnings.

Foreign Income:

For borrowers who earn foreign income, Fannie Mae generally requires the submission of federal tax returns. This is to ensure that the foreign income is accurately reported and can be used to qualify for a mortgage. By reviewing tax returns, lenders can assess the stability and reliability of the borrower’s foreign income.

Self-Employed Income with More than 25% Ownership in a Business Entity:

If the borrower has self-employed income and owns more than 25% of a business entity, Fannie Mae typically requires the submission of federal tax returns. This is to evaluate the borrower’s self-employed income and assess the financial stability of the business. By reviewing tax returns, lenders can determine the borrower’s ability to meet their mortgage obligations based on their self-employed income.

As a mortgage broker, we work with hundreds of wholesale lenders that follow Fannie Mae guidelines and we can offer their mortgage programs to the public. Reach out to us for more information.