Vail Daily column: Balancing your taxes and the ability to borrow
It’s that time of year again for my annual reminder about tax returns for the self-employed and things to keep in mind when applying for a mortgage loan. Unfortunately, some tax preparers are going to think I’m spitting on the Holy Grail here. And somehow self-employed borrowers always want the best of both worlds, in terms of grabbing every legitimate tax deduction they can come find and still be able to get a mortgage loan that they can’t document the ability to pay back.
These days, getting a mortgage loan requires four things: A down payment, good credit, a good appraisal and enough income to demonstrate the ability to repay. There is no compensating for one, even if the other three criteria are rock-solid. Lenders have established some very strict limits on income calculations, and if you are a dollar a month short, there seldom is a solution except lowering the loan amount so you qualify — which means bringing a bigger down payment or buying something less expensive.
A lender will look at your adjusted gross income, which is the bottom line of the first page of your 1040 return. Generally, we will average that number over the previous two years. If you are self employed and your business has write-offs for depreciation, you can likely add those back to stretch your income. Also, if the business consistently pays a car payment or specific credit card we can exclude that payment from your ratios. In some cases, we can add back a home office deduction as well. Keep in mind that we do not look at your net taxable income so you can still deduct any itemized personal deductions without impacting your ability to qualify.
Self-employed people like to take a lot of write-offs. I am familiar with claims that cell phones are for 100 percent business use, and driving to the grocery store entails looking at real estate. I’ve seen returns that the mileage deduction alone would require the driver to be driving 75 mph for 20 hours a week.
People who work for tips seem to be very bad at math when it comes to adding them up come tax time, and while I get they may not care to pay more taxes to support the nonsense that goes on in government, it also limits their ability to get a mortgage loan.
A person should never claim they made more gross income than they actually did — that would be illegal. But there is no law that says you must claim every last business deduction to which you are entitled. Lenders look at your income after your business deductions, and use that quantity to qualify you for a mortgage loan. I’ve had to tell many otherwise perfectly qualified applicants that we can’t do anything for them because they simply take too many business deductions, or might not be declaring all of their tip income. Often, a few hundred dollars in deductions is all that it took to tip the scales against them.
As you prepare your taxes this year, ask yourself what your goals are for buying or refinancing property in 2016 or 2017, as lenders generally average two years. If you will be needing a mortgage loan you need to plan ahead and not take any fewer or any more deductions than need be to accomplish your goals. Sometimes paying a few thousand dollars in taxes can save you tens of thousands by being able to refinance on your terms and time table. Or, if you want to buy a home you might miss out on the current low interest rates by having to wait a few years.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.