Just open a newspaper or turn on the television news anytime in the last few years and you'll know that getting a loan to buy a home or refinance just seems to be getting harder and harder. There is a reason for this and it is called "fear". Basically everyone is afraid of losing money as more and more loans go into default. And this fear of more losses has caused everyone in the business to tighten their criteria for lending. By tightening the guidelines, they feel they are playing a role in limiting future losses.
It is debatable as to whether some of the guideline changes will actually help curb losses. In many cases the answer is a resounding no. However that may be, the fact remains that we have to abide by these guidelines in order to help people obtain a loan.
So in order to help you be better prepared when you talk to a lender about qualifying, let's look at one of the key components to the process. This is your federal income tax returns (1040's).
If your self employed or you work for someone and receive a W2 form at the end of each year, you will be required to furnish copies of the last 2 years of your income tax returns when you apply for a loan. This may seem strange when you are a wage earner and your pay-stub and W2 forms show the income you made. And in times past, that was all you needed to produce to prove your income.
Nowadays, underwriters are required to closely examine your returns because they are looking at what you wrote off in the way of expenses. For W2 wage earners the big concern is "unreimbursed employee expenses". These are business related supplies or equipment that you purchased but your employer wouldn't pay for. Since they are entered on your returns, the underwriter will deduct them from your income. Typically they will average these expenses you reported from the 2 years of returns.
If you are self employed, then all expenses incurred in the operation of your business will be deducted from your income. The best way to get a feel for your actual income is to examine your Schedule C. Line 31 is your net income from the operation of your business after all expenses are taken out. You can add back in the expense from line 30, for having a home office, and you can add back in any depreciation. Do the same calculation from each tax return; add the total income figure together and divide it by 24 months. That is going to give you a pretty accurate income figure that will be used for qualifying.
It is tempting to view the write off's on your own returns as being merely "paper losses" in order to pay less income tax. Although we may all understand what a paper loss represents, and that your actual cash flow is higher, what you have submitted to the IRS is going to determine your income when it comes to qualifying for a loan.
We are working in a lending environment where everyone deals in facts and your tax returns will define your qualifying income.
If I can assist you in qualifying for a loan or if you simply have questions and need answers, please feel free to call me at (805) 237-8811.