Tax Day is here – now what?

It’s tax day… a day of celebration for everyone (especially CPAs) because it is finally over! Now, before we get too carried away with partying, let’s have a quick refresh on what tax returns mean when applying for a loan.

Borrowers who are self-employed, earn income through commission and bonuses, or are 1099 employees are qualified using their tax returns. The income that can be used when applying for a loan is the amount of money left over after business expenses are deducted. What does that mean? Here are some examples for each category:

1. Self-employed: let’s say a business has gross sales/earnings of $180,000 for 2013. Once the tax returns are filed, there was $120,000 deducted for business expenses. The net profit for that business is $60,000, and that is the amount used for the loan application. While the business may have taken in $180,000 for the year, the business spent $120,000 to earn that $180,000. That is why the net of $60,000 (or $5,000 per month) is used when applying for the loan.

2. Commission: employees who earn all or part of their income through commission may be able to write off some unreimbursed business expenses. The tax returns would show the net income (gross commission income – unreimbursed business expenses). Take the net income number from the past two years and average it out. Assuming the commission income is not declining, the two year average is used for the loan application.

3. Bonus: again, tax returns are used to verify if unreimbursed business expenses were claimed. Once a two year history of receiving bonus income has been established, and the bonus income is verified to be likely to continue, bonus income can look be used on the loan application.

4. 1099 employees: those who are 1099 contract employees are treated as self-employed for the purposes of applying for a loan. The same requirements as described above also apply here.

For those applying for a loan who are W2 salaried employees, none of this applies. For those of us who are not W2 salaried employees, don’t forget there are extra steps involved when applying for a home loan. Don’t assume the income will be fine, but take the time to make sure. We all know what happens when you assume… you can wind up homeless. Contact me today to get started to ensure you are ready to move forward without the unexpected bumps in the road when buying your new home.