If you’re planning to get pre-approved for a mortgage, how you file your tax returns matters. Whether you’re self-employed or employed full time, how you file your taxes can affect your ability to qualify for a mortgage.
When lenders look at a mortgage loan application, they need proof of income. Typically, the tax returns are the cornerstone of this process, and here is some information on best practices on how to approach this:
Here’s What To Do:
File your tax returns on time and consistently. Mortgage lenders typically require 2 years of tax returns, and late filings can raise red flags about your ability to qualify.
Keep your income reporting consistent and accurate. Any discrepancies between your tax returns and other income documentation will require explanation and could delay approval.
Maintain detailed records of all deductions and business expenses if you’re self-employed. Lenders will scrutinize these and may add back certain deductions to calculate your qualifying income.
Pay any taxes owed promptly. Outstanding tax debts can disqualify you from certain loan programs, and payment plans may affect your debt-to-income ratio.
Consider the timing of major tax moves. Large deductions or income changes in the year before applying for a mortgage can complicate income verification.
What NOT To Do:
When it comes to applying for a home loan, not documenting all of your income can be a crucial mistake. If it’s not on your taxes, lenders oftentimes won’t count it. That means you might qualify for less or not at all.
Mortgage lenders need your most recent tax return. If you’re behind on filing, it slows everything down. Sometimes, it can even pause your loan process completely. Filing an extension can be okay, but it can make determining your income more complicated.
If you’re self-employed and write off too many expenses, it might lower your taxable income. This is good for taxes but not for loans. Specifically for self-employed individuals, lenders will look at the net income of the business along with what you paid yourself. For example, if your business grosses $100,000/year but you write off $70,000 in expenses, the mortgage lender will view this as you only earning $30,000 if you did not pay yourself a salary.
If you’re thinking about buying in the next year, give us a call to speak to one of our Mortgage Loan Originators at (760) 930-0569. We are here to talk through your goals and find out which mortgage loan programs could be ideal for your needs.
