Thinking about getting a mortgage loan? If that is a yes, purchase or a refinance mortgage, make sure your federal income tax returns are clean. Mortgage lenders will run a fine tooth comb through your federal income tax return looking for any losses in income which reduces your ability to qualify.
Getting a home loan today feels similar to going through an IRS audit although they’re not the same they are similar. Home mortgage lenders put the greatest weight on your income and relative debts when making a home loan.
Here are some tips when filing your 2011 income tax return so you can still get a mortgage.
W-2 Employees:
2106 business expenses can significantly weaken your ability to qualify for mortgage loan financing. 2106 business expenses are unreimbursed business expenses you paid during your employment in the previous year. If you’re trying to get a mortgage loan or will be in 2012, do not take these.
There’s pros and cons. The pros involve paying less income taxes and getting a break from Uncle Sam. The cons are these losses are deducted from your gross monthly income used to qualify you for the home. Simply put, if you have say $10,000 of unreimbursed business expenses, the lender is going to divide that number by 12 months which would give us a monthly loss of $833 per month. If you make $6000 per month, your qualifiable income just went from $6000 per month to $5167 per month.
Self Employed/Business Owners:
For our purposes we’ll be looking at the sole proprietor, the schedule C. income borrower. Line 31 the net profit or loss on the schedule C. of the federal income tax returns is the money line. The way mortgage lenders look at this income is by taking the amount listed on line 31, adding in line number 12 which is depletion, adding in-line number 13 depreciation, adding in line 24 B deductible meals and entertainment then doing the same calculation with the previous year’s income tax returns. They then added the two years together and divide that number by 24 and that is the monthly income used to qualify for mortgage loan financing.
So when you’re going to file your 2011, in order show the highest amount of income used for qualifying purposes, make line #31 showing a large profit with along with large expenses, depletion, depreciation, meals and entertainment. These are the areas that have the ability to make or break a home loan for a self-employed borrower.
It all boils down to a trade-off. Pay more in income taxes and have an easier time getting a mortgage loan or pay less in income taxes than run the risk of qualifying for the home loan.
Before you file your income tax returns, consider the long-term horizon of mortgage financing in the next 12 months. If there is a possibility a home loan is in your future, make sure you cover these areas with your tax professional.
*Please consult these home loan qualifying income tax parameters with a tax professional.
Whether considering a purchase mortgage or refinance mortgage, mortgage lenders factor in qualifying the same. Talk with your mortgage lender upfront about these potential concerns so you can be on your way to successfully procuring a mortgage loan. Discover why you need to watch how you file your income tax returns when getting a home loan.
