How Taxes Can Impact Your Ability to Get a Home Loan
Tax Season is around the corner
Attention self-employed income earners! This tax season, consider checking in with your lender in addition to your CPA. If you have real estate purchase goals for next year, your tax returns could make or break your purchasing power and it’s important to get your lender’s eyes on your numbers before they’re filed and final.
Jamin Cousins
Why listen to me. Hi, my name is Jamin and I am a dedicated and driven home finance professional. I’m passionate about delivering the best client experience in the business through client education and clear communication. I am a Twin Cities resident and real estate investor, and believe real estate is a catalyst to wealth-building and generational legacy!
Income
Now to the good stuff… There are approximately 153,450,354 ways to evaluate and underwrite income. The nature of that income, loan product and employment history are just a few factors that determine these evaluation methods. In many cases, it simply comes down to an underwriter’s discretion. For W2 wage-earners, your employer-issued pay stubs are the main document we use to determine your qualifying income for a home purchase. In most cases for self-employed borrowers, it comes down to the almighty tax returns.
Debt-to-income
But wait. Let’s back up even further. How exactly does your income relate to a home purchase? As with most industries, ours is full of acronyms. One of the most common is DTI (debt-to-income). Your debt-to-income ratio is calculated by dividing your total monthly debt payments (including the potential mortgage payment) by your monthly taxable income. Your max DTI is determined by several factors including credit score, loan product and down payment size. It’s good to shoot for a DTI below 45%, although some loans allow you to go higher.
Tax Return
Ok where were we? Ah yes, the almighty tax return. Being self-employed is a bit magical. You can often make your own hours and build your business the way you want to. You also have the unique ability to determine your taxable income through ordinary income on a k-1 (corporations and partnerships), paying yourself w2 wages through your company, or deducting expenses on a sole proprietorship. The bottom line is this: once your tax returns are filed, your income is determined for better or worse. If you deducted most of your income through your business expenses, there may not be enough to qualify for that primary residence, cabin or investment property.
Let’s talk. Don’t claim no INCOME! When you’re preparing your taxes with your CPA, it can be super helpful to bring your lender into the conversation. There are certain expenses you can deduct from your taxable income that we can add back in for qualifying (depreciation, amortization, etc.). There are other expenses from which we need to subtract an even higher amount from your qualifying income, than what’s subtracted from taxable income! It’s often a balancing act of mitigating your tax burden and claiming enough income to qualify for financing. You can’t pay no taxes AND qualify for your dream home in most cases. That’s what we’re here for! Let your lender and CPA help with that balance.
We are excited to help so reach out today!
Jamin & Jen
Definitions (for non-financing nerds):
Underwriting: the process of making sure the loan conforms to government-mandated guidelines regarding borrower’s ability to repay the loan.
Taxable income: gross income before any taxes or business expenses/deductions (for self-employed people).
Qualifying income: The monthly income we can use towards qualifying for the loan according to the above-mentioned guidelines. This is often different than taxable income if the guidelines require us to average the income over a longer period.
Self-employed: according to guidelines, we must consider someone self-employed if they own more than 25% of the company they work for. Self-employed borrowers also may receive 1099’s instead of W2’s and may deduct business expenses from their income while W2 wage earners may not.
Investor // Landlord and DIYer // Realtor // Business Consultant // Globe Trotter // Converting Vegan.
