How 2012 Taxes Affect Home Loans

An important message from our friends at Cherry Creek Mortgage


Tax time is just around the corner! As you prepare to file your 2012 federal income tax return, I wanted share a few of the hot items to keep in mind; specifically when it comes to obtaining a home loan.

Until April of this year when the deadline approaches for taxes to be filed, lenders will use either 2010 and 2011 tax returns or 2011 tax returns (depending on loan type) to calculate income for your home loan. If you are currently pre-qualified, but have not yet found a home, it’s important to be aware of the items which may affect your pre-qualification once taxes are filed.

Below are a few items that can affect your home loan pre-qualification:

  • Declining Income from 2011 to 2012 – if your income has declined from 2011 to 2012, this may be a problem. Be sure to discuss with your lender.
  • Un-reimbursed Business Expenses (Form 2106) – such as uniforms, union dues, licenses or exams, travel expenses, car mileage, meals and entertainment. These will be subtracted out of your qualifying income.
  • Schedule C Filing (for those self-employed or who have a side business)  Income/Loss – this can affect you even if it’s not your primary form of income. See next week’s update when I’ll unveil the mystery behind how lenders calculate income for a self-employed borrower who files a Schedule C form on their tax returns.
  • Schedule E Real Estate – the purchase of additional properties or the conversion of a primary/secondary residence to an investment property will affect the income/loss numbers from the previous year.

Keep in mind, timing is important! Once you file your 2012 tax return, it can take the IRS 4-8 weeks to process the filing. If your home loan pre-qualification depends on the income reported on your 2012 tax return, lenders will require the return to be processed and verified by the IRS before the income can be used for qualifying.
This is most important for self-employed borrowers or those filing a Schedule C or Schedule E.
Also, if you file an extension, lenders will require a copy of the extension along with proof of any payment required at the time of the extension. If you are self-employed, lenders generally require a P&L (Profit & Loss) for the previous year (in this case 2012) and a year-to-date P&L for 2013.

I realize this topic is complex, however it is so important this time of the year. Educating our clients on how tax returns can impact their home loan pre-qualification is a key ingredient to understanding the home finance process. This way we can possibly avoid the tragic “well, you were qualified but now you’re not because of your tax filing” discussion. Knowledge is good – share it! ~Kelly


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