Blog with MAE Capital

Two pitfalls Borrowers run into when trying to get a loan

February 16th, 2012 3:02 PM by Gregg Mower

First you need a great deal of patience, as no matter how much you have or how little, you will be questioned on every aspect of your financial situation. The two biggest things that are stumping people when trying to get a home loan are their tax returns and large deposits in their bank accounts. In the old days of 5 years ago we only needed tax returns when the client was self employed or had rental properties now tax returns are required on all borrowers and transcripts from the IRS are pulled on every transaction. What this means to the average tax payer is that if you are one who like to write off everything to get a bigger tax return or owe less, then you are going to be penalized when you try and get a home loan as your income will appear less than it really is. The following line items on your Federal tax return are ones lenders will be looking at;

1. Line 7 W2 wages: must provide lender with last 2 years W2s to support this income and all W2s in the year of the return must add up to line 7.

2. Line 8a and 8b interest income: The lender will only use interest income to qualify you if you can prove it will continue and you will not be depleting you interest income by using some money for the down payment.

3. Line 10 Taxable refunds: not used as income as the lender will not be able to prove that it will be on going income.

4. Line 11 Alimony received: The lender can use this as income if there is a 2 year history and it will be on going for the next 3 years evidenced by a court order. Borrower must provide 12 months of a deposit history of receiving alimony or 12 months cancelled checks from the giver of the payments.

5. Line 12 on your form 1040 shows self employed income: This line is the most tricky line on the whole return as this income or loss is from the schedule C in the return. This shows a self employed business’ gross income and all the expenses for that tax year. Here is where it gets tricky, a lender can only use income to qualify a borrower that is shown in the tax returns. In other words if there are cash receipts that are not claimed on the return then the lender cannot use any additional income. The lender can add back in paper losses of depreciation and depletion and a portion of business use of home.

6. Line 13 Capital gain or (loss): This is where a schedule D is filed and will show where the gains. This is not used by lenders as income as it cannot be proven to continue for the next 3 years.

7. Line 14 is the same as 13

8. Line 15 and line 16 IRA distributions and pensions: Lenders can use this income if it can be proven to be on going for the next 3 years such as enough money verified in the respective accounts to distribute over the next 3 years.

9. Line 17 Rental Real Estate income, partner ships, s corps, trusts ect.: This is another complex evaluation of the schedule E. With rental properties most tax payers write off as much as they can as to avoid taxation, a lender can only use income that is put in the schedules and can add back only depreciation and depletion. The lender will only use income on properties if the tax payer has a two year history of being able to mange rental properties. As for other corporations or trusts the lender will ask for the tax returns for them as well. If you file this on your returns it will take longer for a lender to give you a definitive answer on your loan.

10. Line 18 Farm income; This will be treated like line 12 self employed. Be prepared to get additional documentation to your lender if you have this kind of income.

11. Line 19: this line is interesting as some people, such as seasonal workers, will have this on their last several years of returns and can be use to qualify if it can be proven as part of the borrower’s income cycle.

12. Line 20a Social Security income: This income can be used in qualifying for a mortgage if you provide the lender your current Award Letter from the Social Security Administration and proof of receipt such as a bank statement or a pay-stub.

This is what a lender looks at in a return that can help or hurt a potential borrower in today’s lending environment. In addition to the tax return lenders are evaluating large deposits in a bank account and making borrowers explain every deposit over $200 in a particular month. If the borrower cannot explain these deposits the lender cannot use that money towards the total cash use to close the transaction and in some cases leaving the borrower short of verified funds to close and thus not allowing a borrower to borrow based insufficient funds to close. Keep tuned to this blog as I will be bring new information on this and other subjects, and as always please leave any comments.

Posted in:General
Posted by Gregg Mower on February 16th, 2012 3:02 PM

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