Can Tax Returns Affect Your Mortgage Loans? Last month, I wrote about managing large deposits and how they can correlate with preparing you for the home buying process. Another extremely important step that affects home buyers and homeowners are tax returns. Tax returns can create delays with loan closings and in some cases, prevent you from buying or refinancing if you are not prepared. Six plus years ago, mortgage lenders, brokers and consumers alike were accustomed to hearing phrases like “No Doc”, “Stated income Stated Assets”, “Stated Income Verified Assets”, along with a multitude of others phrases. These phrases were three different types of loans that were offered that did not require any verification of income; these loan types no longer exist for obvious reasons. Nowadays, for a mortgage loan approval, the ability of a home buyer or homeowner to repay a debt must be shown. This is determined by verifiable, regular and recurring income a home buyer/home owner makes and stability of employment. Part of the verifying includes tax returns, which are required for all buyers and homeowners. W2 employee’s (noncommissioned) looking to secure a government backed mortgage (FHA/VA/USDA) will need to supply the most recent two years tax returns, all schedules. The most recent year of returns is needed if a W2 employee is looking to secure a conventional mortgage. One common issue that a lot of lenders miss in the very beginning of the process is unreimbursed expenses. This is a common misstep
that costs time and money and it is very simple to avoid. Simply look at Schedule A of your 1040, line 21, and see if there are any unreimbursed expenses being claimed. If there are, these need to be treated as a liability and deducted from income for debt to income ratio purposes. Most of Jay White the time, home buyers and home owners are writing off mileage and there are ways to lower the impact to your debt to income ratio. Self-employed clients are required to show the most recent two years personal returns. If you are an Officer/Shareholder/ Partner who holds 25% or more ownership, you will be required to supply most recent two years business tax returns, all pages, in addition to the personal returns. The two years of business returns are required to show that a business is viable. In mortgage lending, you’re considered Self Employed (meaning always need two years tax returns no matter loan type) if any of the below apply to you: • Sole proprietor who files a Schedule C • Partner of a business with 25% or more ownership • Shareholder or officer in a business with 25% or more ownership • Work for a family owned businesses continued on page 47
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ACW O R T H C O M M U N IT Y M AGAZ INE | AUGUST 2 0 1 3
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