Deductions can impact mortgage application
There are only a few days left until the April 15 IRS tax filing deadline, and rushing to get documents to our accountants is a short-term priority for many of us. However there are some important long-range priorities to consider in your tax prep if you are planning to apply for a mortgage.
The information that follows is not one you can toss to your CPA to handle. Rather, it is information you must know and share with your CPA as they prepare your return. It can impact whether you qualify to purchase a home loan in the next two to three years.
Certain business-related deductions can impact your ability to qualify for a mortgage. It is natural to take advantage of every allowable deduction. Deductions equate to reduced taxable income, which means less taxes paid, which means more money in your pocket. However, understand that taking advantage of work-related write offs means lower income used to qualify you for a mortgage. A savvy CPA could inadvertently be reducing your ability to qualify for the loan amount you desire - this year, next year, or even further down the road.
When qualifying for a home loan, your lender calculates the ratio of your income to your monthly expenses. For a straight salary, W2 employee, total taxable wages are generally used as the income in qualifying. However, when unreimbursed business expenses (home office, mileage, etc.) are claimed, qualifying income is reduced by that amount. And for self-employed individuals (Schedule C, 1120S – you know who you are) gross revenue is insignificant to the lender. They must see net business revenue after all expenses on two years’ worth of tax returns. If you file your 2018 tax return in April of 2019, that tax return will be considered in qualifying for a loan in March of 2021. And if you file extensions, it will follow you even longer.
Conclusion? If there is a chance that you might want to buy a home in the next few years, consider the impact deductions have on qualifying income, and consider talking to a mortgage lender before making a strategic decision.
Trey Powers is a mortgage loan consultant with City Bank Mortgage, Dripping Springs.