What Do Underwriters Look for on Tax Returns?

By Bill Lyons | Updated on January 29, 2025

If you have ever applied for a mortgage, you probably know that there is a tremendous amount of documentation that goes into the process. One of the most common questions people ask is whether they need to provide tax returns as part of their mortgage application.

While this isn’t always the case, there is a good chance that you will be asked to provide tax returns when applying for a mortgage. So what do underwriters look for on tax returns? And how many years of tax returns are needed for a mortgage?

Do You Need to Provide Tax Returns When Applying for a Mortgage?

It’s no secret: when you apply for a mortgage, lenders want to know that you can repay the loan. To assess your financial situation and determine whether or not they should extend credit, most lenders will require one to two years of tax returns from potential borrowers. Keep in mind that there could be some additional questions you need to answer, and the lender might ask for some additional documentation as well.

It’s important to note that tax returns aren’t required for every loan type. Since tax returns often aren’t a perfect representation of income for those such as investors or business owners, other mortgages allow for different methods of income verification. We discuss some no tax return mortgage options later on in this article.

Why Do Mortgage Lenders Request Tax Returns?

Lenders ask for tax returns because they want to assess your ability to qualify for the mortgage and repay the loan. By looking at W-2s and other income statements associated with filing taxes, lenders can verify a borrower’s earnings and determine whether they’ll be able to keep up with their mortgage payments.

Not having verifiable tax returns can raise questions regarding reliability and responsibility—so if you’re facing this issue right now while applying for financing options like mortgages or refinance loans, then getting current on those filings is essential. There are many types of home loans available, but the process can become complicated if you don’t have up-to-date tax returns or you owe money to the IRS.

How Many Years of Tax Returns Are Needed for a Mortgage?

So how many years of tax returns for mortgage? Most lenders will require 1-2 years of both personal and business (if applicable) tax returns when assessing your income level. This is because a mortgage loan is a long-term commitment, so they want to be certain that whatever monthly payment amount is agreed upon fits nicely into an affordable budget over time.

If real estate investment happens to be part of your financial profile, there are other documents that might be needed. For instance, you may need to provide two years’ worth of Schedule E forms with everything else as well. Or, if you’re a self-employed individual, you should have your profit and loss statements ready for review just in case they are needed.

On top of these typical requirements, it doesn’t hurt to prepare yourself further by gathering additional documentation relevant only for special circumstances, such as substantial interest income or rental property profits.

What Do Underwriters Look for on Tax Returns?

There are several important elements that underwriters are going to look for on your tax returns. Some of the most important aspects that they will consider include:

Your income

Tax documents can give lenders a more accurate picture of your finances, including income sources and amounts that are eligible for loan applications. Non-recurring revenue such as bonuses, vehicle sales, or lottery wins typically won’t be counted towards qualifying earnings, so it’s important to consider how you’re reporting these types of funds.

Deducting expenses from taxes may reduce the amount you’re able to borrow, but don’t expect any deductions without actual cost (such as depreciation) to do the same. If you have questions about how deductions can impact your ability to take out a mortgage, reach out to the lender for more information.

Self-employed individuals need to pay extra attention when calculating their income for mortgage purposes—particularly if they operate through partnerships or corporations—since underwriters will average two years’ worth of net profits minus depreciations in order to come up with an estimated monthly figure.

Your tax details provide essential information about what counts against loan eligibility, while self-employed applicants must take additional steps when submitting proof of earnings.

Your DTI

Your debt-to-income ratio (DTI) is the key to accessing the best mortgage options. It gives lenders an idea of whether you can handle a monthly mortgage payment without having trouble meeting other financial obligations and commitments.

To calculate DTI, all you need to do is add up your current monthly debts (credit cards, car payments, student loans, current mortgage payments, and so on) and divide that by your average gross income each month, then multiply it by 100 for a percentage value.

For instance: Let’s say you have a total of $2,000 in bills every month and have an average gross income of $5,000 per month. In that case, your DTI comes out at 40 percent. Most lending companies will usually approve applications from creditworthy applicants who have a maximum DTI of 50%, but if yours falls below that number, you’ll open yourself to even more opportunities when it comes down to borrowing money for mortgages.

Your level of risk

In reviewing your tax returns, underwriters are evaluating your overall level of risk. Mortgage lenders want to minimize risk and thus take care to verify that an applicant meets at least the minimum financial requirements for the loan they’re applying for.

Lenders want to be sure that you’ll be able to comfortably afford your mortgage in the long run, so they will take a close look at your income over the last two years. Lenders are looking for consistency and stability—if there’s been any decline year-to-year, or changes in pay structure, job switches, or other fluctuations, then additional documentation may be required.

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No Tax Return Mortgage Types

It can be frustrating if you need to provide tax returns for a conventional mortgage and you are subsequently turned down. Fortunately, there are plenty of mortgage options that do not necessarily require a tax return at all.

Bank statement loans

Are you self-employed and in need of a loan? A bank statement loan can be the perfect option to get you the money you need. With this type of non-qualified mortgage, lenders will use your bank statements as evidence that you have the means to pay off your debt. This way, even if taxes don’t reflect all of your income, borrowers can still access home loans with ease.

For entrepreneurs, business owners, or retirees who want an alternative form of verification, bank statement mortgages can be a great option! We also offer P&L loans for business owners who want to qualify for a mortgage using their profit and loss statements, as well as self-employed home equity loans and cash-out refinance loans for those looking to tap into their existing equity.

Asset-based loans

Rather than relying on financial documents like tax returns or salaries, an asset-based loan allows lenders to build an amount known as a “borrowing base” which is based on the percentage of the total value of the assets. For example, 70 percent would be taken out from retirement accounts, while 100 percent of liquid cash in checking or savings accounts could also serve as collateral. It’s important to note here that terms vary depending on the lender, so make sure you specify the percentage you can borrow and the assets you want to use.

DSCR loans

Real estate investors have a unique set of needs when it comes to financing, and a DSCR loan is an ideal solution. This type of non-QM loan helps lenders easily measure the borrower’s ability to make payments without verifying income through tax returns or pay stubs.

Instead, lenders use the applicant’s debt service coverage ratio (DSCR) to measure whether they have the capacity to repay a mortgage in addition to their other debts. As investors often write off expenses related to their properties, this kind of financing makes qualification simpler and provides access for those who may not qualify under conventional terms.

Understand What Mortgage Underwriters Look for

Whether you’re applying for a conventional mortgage or a VA loan, there are a lot of factors involved when you apply for a mortgage. Understanding what mortgage lenders look for on tax returns can help you better navigate the lending process and determine the loan type that best suits your needs.

You might be asked for copies of your tax returns, but you could also have other options available as well. If you want to apply for a mortgage without needing your tax returns, Griffin Funding is here for you.

Our team of expert underwriters and loan specialists will work with you to help you find the right mortgage to meet your needs. Are you ready to get started? Reach out today to schedule an appointment and let us help you finance your next home.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.