If the FHA is providing insurance on the loan, I assure you they will demand old tax returns, specially if they’re as recent as 2005 (That’s still an open year for IRS audits), if current income couldn’t have supported the original loan that is being refinanced. You’re right on the “I didn’t know” defense. But only if it’s credible. (A handwritten preliminary loan app, in the borrowers handwriting, for instance might mke that defense not credible) The FHA has a long history of demanding stringent underwriting standards. The last 4 years have helped many in the industry to forget the headaches of getting an FHA loan funded. They have never made it easy. I don’t suspect that will change.
