Are you self-employed and applying for a mortgage?
January 5, 2018
Death and taxes — you know how the saying goes. For all of us, one of those two is quickly approaching. Unless you plan to file extensions, your 2017 income taxes are due to Uncle Sam in April.
Gathering and organizing all of the necessary documentation to file your income taxes can be an arduous task, I know. The same can be said for going through the mortgage application process and applying for a loan. Much of the documentation required for filing your income taxes is the same documentation I need for the mortgage application.
Both processes go hand in hand, and the scenario is even more intertwined with borrowers who are self-employed. Underwriting a self-employed borrower's tax returns in order to derive an accurate figure for their annual and monthly income is a complex task. For better or worse, the net numbers that show on line 22 or 37 of a personal 1040 tax return is often not the number I will use for the annual and monthly income on the mortgage application.
Continually, I urge self-employed borrowers to meet with me so that I may review their tax returns for accurate income calculations. Before annual tax returns are filed with the IRS is the best time to go through this exercise. Prior to filing the returns is the point in time when specific adjustments can be made to either show more income on the tax returns or possibly to take more deductions and lessen the tax payments. Do note that I highly recommend adjustments be made in consultation or in conjunction with a borrower's accountant or bookkeeper.
Less May Mean More
Please do not misconstrue that statement. In no way am I implying that anything illegal, or not in accordance with IRS rules and regulations, should be done. I am simply stating that just because a borrower may technically be eligible for a specific deduction does not mean that they must take the deductions. Fewer deductions taken mean more income shown, and that may help borrowers qualify for their specific financing needs.
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The opposite is also true. A borrower may show ample income to qualify for their specific financing need and thus may be able to maximize every deduction they are eligible for.
But once the returns are filed and in with the IRS it is difficult to go back and make any retroactive adjustments to the returns to try and squeak out more income for qualification. In many cases, the difference between a self-employed borrower qualifying for, or being denied, a specific loan is a very small amount of annual income. When a tight scenario presents itself, it can be a frustrating experience for everyone involved with the transaction.
As we are all aware, President Donald Trump signed new tax code and new tax legislation late in 2017. Therefore, the scenario or manner for deriving a self employed borrower's deductions and net income may be different than what it was in previous years. This being the case, it is now even more imperative, if you are self-employed and have financing plans in the new future, to begin discussing and analyzing the specific details with a seasoned mortgage professional sooner than later.
Again, every self-employed scenario is different and unique. But every self-employed scenario requires a meticulous review from a mortgage professional in order to determine borrowing capacity.
William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and. For more information, go to .