[pdxjayhawk]

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Just out of curiosity, if there are no w-2 forms etc, how do you know if the tax return is real? Can someone just keep a dummy return for credit purposes? Is would seem maybe there is a law against this (can you cite the law it breaks), but if you're not actually submitting anything false to the IRS...

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You're signing a document, a loan application, that contains assurances from you that everything on the application is true. Submitting a dummy tax return for the purposes of borrowing money is fraud. Most lenders now require mortgage applicants to sign a form 4506, which allows them to compare the applicants tax return against the actual return submitted to the IRS. If the numbers don't match, you've got huge problems.

OP should be fine, as long as he and his lady find a loan program that allows a "non occupant co-borrower". And the earlier post is absolutely right. Even without granddad, OP could get a mortgage using a so-called NoDoc, or no income verification loan.