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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