how filing your tax returns might hurt your mortgage chances

If you’re looking to purchase or refinance a home, and you have not filed your 2021 tax return yet. And this goes for any year, here’s what you need to know as it relates to showing income.

 

Let’s say you’re self-employed or you’re a W2 employee and you have additional income sources. Such as an added business for example or rental property. If you’re in the middle of a pre-approval or you’re in the middle of escrow, what you don’t want to do is submit new tax returns that show less income. Sounds simple enough but it’s not so straightforward. The lender is using your 2020 tax return to qualify you for your house purchase. You responsibly then go file your 2021 tax return showing less income. Supplying less income to the mortgage company which thereby could create a debt-to-income ratio problem. When you are in the middle of escrow you don’t want to be supplying any new documentation that supports showing less income. If you’re making less income, you should first stop and talk to your loan officer about best how to restructure your loan. Maybe it means changing loan programs, interest rates, the down payment, or putting down less money in paying off consumer debt. Any of those could be pragmatic solutions for fixing a debt-to-income ratio problem.

On the other side let’s say you’re a W2 employee and you have rental income. Those rents based on how they report could hurt your mortgage chances. Or, even if it’s questionable in any way close the loan with the income that you have. Supporting new income runs the risk of more questions and potentially more problems. Make no mistake the number one reason today why people don’t get mortgage loans is due to debt-to-income ratio. Taking on more debt than what they can otherwise afford. That also means showing less income. So, so if you know you’re going to support less income from the most recent tax filing do an extension because you don’t know what the future may hold.

Keep this in mind as it relates to supporting income; if your two most recent years’ taxes are strong, and perhaps you get the bulk of your income at the end of the year wait to file your taxes. Get an extension and a lender can close a loan for you from the January of that year until October of that year when taxes are due. The lender would only then ask for a copy of the extension form. This affords you the ability to decide what you’re going to do with your accountant as it relates to income after you’ve successfully closed on your home.

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When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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