We’re so lucky to have guest blogger, Lori Richardson, Vice President of Cherry Creek Mortgage with us this week. She’s talking about a topic that is frequently discussed among self employd professionals but also has an impact on everyone’s home buying ability. How you file your taxes may affect qualifying for a home.
Take it away Lori…
Tax time is just around the corner! As we all prepare to file our 2015 federal income tax return, I wanted share a few of the hot items to keep in mind; specifically when it comes to obtaining a home loan.
Until April of this year when the deadline approaches for taxes to be filed, lenders will use 2013 and/or 2014 tax returns (depends on loan type) to calculate income for your home loan. For clients currently pre-qualified, but have not yet found a home, it’s important to be aware of the items which may affect their pre-qualification once taxes are filed.
Below are a few items that can affect the home loan approval process.
- Declining Income from 2014 to 2015 – if income has declined from 2014 to 2015, this may be a problem. Be sure to discuss with your lender.
- Un-reimbursed Business Expenses (Form 2106) – such as uniforms, union dues, licenses or exams, travel expenses, car mileage, meals and entertainment. These will be subtracted out of the qualifying income.
- Schedule C Filing (for those self-employed or who have a side business) Income/Loss – this can affect the home loan even if it’s not the primary form of income.
- Schedule E Real Estate – the purchase of additional properties or the conversion of a primary/secondary residence to an investment property can impact the home loan.
- Timing – Keep in mind, timing is important! Once 2015 tax returns are filed, it can take the IRS 4-8 weeks to process the return. If the loan approval is based on the 2015 income, lenders will require the tax return to be filed AND processed by the IRS before the income can be used for qualifying. This is most important for self-employed borrowers or those filing a Schedule C or Schedule E.
- Extensions – Also, if an extension is filed, lenders will require a copy of the extension along with proof of any payment required at the time of the extension. Lenders generally require a P&L (Profit & Loss) for the previous year (in this case 2015) and a year-to-date P&L for 2016 for self employed buyers who file an extension.
I realize this topic is complex, however it is so important this time of the year. Educating our clients on how tax returns can impact their home loan pre-qualification is a key ingredient to a successful closing. We want to do all we can to avoid the tragic “well, you were qualified but now you’re not because of your tax filing” discussion. Knowledge is power!
Please note: this information is general in nature and is not intended as investment, tax or real estate advice. Please refer to your independent tax advisor for further information.
Lori Richardson
Vice President
Cherry Creek Mortgage Company
