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


What’s Up With the Housing Market?

PORT WASHINGTON, N.Y. (MarketWatch) — As the U.S. economy rounds the Labor Day turn, it appears that, after several false starts, the long-depressed housing market is finally climbing out of the basement.

It is nothing more mysterious than supply and demand. For the first time in a number of years, the supply of both new and used homes available for sale has dropped below demand.

No matter what the product or service, whenever demand exceeds supply, rising prices are sure to follow. Housing is no exception. Prices are rising both quarter-to-quarter and year-over-year for the first time in two years.

This turnaround in prices is apparently convincing would-be homebuyers that it does not pay to delay — especially since mortgage interest rates are at 60-year lows, and homes are the most affordable they have been in at least a quarter of a century.

As a result, buyers have begun to deal. Home sales are up more than 20% from a year ago, while pending sales are now at a 2-1/2-year high. This should kick home prices even higher, and thus spur even more buying.

In a market such as the one housing has just been through, rising prices are a good thing.

First of all, they will help those homeowners who are underwater — that is, those who owe more on their mortgage than their house would fetch were they to try to sell it.

Second, higher home prices make homeowners feel wealthier. When this happens, people are more willing to spend. As you can imagine, this gives a lift to a whole bunch of industries that depend on consumer spending.

Rising prices also encourage fence-sitters to bid on the house of their choice. Finally, seeing this action, potential sellers may well be tempted to put their homes on the market, thus making it more liquid and permitting easier comparisons with other homes.

As inventories of new homes begin to dwindle, construction will perk up. Already, builder confidence in August rose more than expected and now sits at a five-year high.

Naturally, this means more jobs for those in the construction trades, with the resulting ripple effect on materials and supplies.

And as people move into these homes, there is more demand for furniture, home appliances and motor vehicles, as well as other consumer goods and services.

This sequence of events has been part and parcel of every business-cycle recovery in the postwar period, and this one will be no exception — when it kicks in. For you see, politics is affecting the housing market, too.

Since there is a great deal of uncertainty over taxes and regulations post-Dec. 31, buyers, sellers and builders will want to be certain that mortgage interest and property taxes remain deductible so they can accurately determine affordability and thus how much to bid or ask.

Because of the elections and partisan politics, the fate of these items will not be known until well into next year — if then. Obviously, it all depends on who is elected president, which party controls Congress and how willing they are to work together.

Chalk up another speed bump that lies in the path of this fragile recovery.

Irwin Kellner is MarketWatch’s chief economist.

Click here for the complete article.

2010 Interest Rates–Going up or Staying Flat?

What is on the horizon for interest rates this year?

What will happen with home loan rates is probably the easiest prediction to make for 2010…they will move dc monumenthigher! The Federal Reserve’s Mortgage Backed Security purchasing program is set to expire in March of this year.  We have already seen rates trend higher with the Fed’s reduced purchasing power in the market.

Even though rates are expected to move higher, they won’t necessarily do so in a predictable manner but instead will move in waves and continue to be extremely volatile (this is so much fun when this happens!). The anticipated range for rates is broad, with lows being around 5% and the highs reaching 6.5%. While rates are no longer at the historical lows of 2009, they are still incredibly low right now but they won’t be for long. If you are on the fence, act now or be prepared to pay a higher rate in the future.

By:  Kelly Zitlow, Suburban Mortgage, BK #10123