Posts Tagged ‘bonus income’

Mortgages and Filing Tax Returns

March 22, 2016

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It’s tax season, and you are trying to buy a home. Not only must you navigate finding a home, applying for the loan, and filing your taxes, you may not realize that the tax filing could impact qualifying for a mortgage.

Well, it can impact qualifying for that home mortgage, and how much it impacts depends on how one is paid.

I’ve talked in the past on this site about how it is just as important how someone is paid instead of just how much someone makes. After April 15th, how someone is paid also impacts the documentation required for the annual income tax filings:

  • W2 salary: will need proof of the filing of the tax returns. If an extension is filed, proof of the filed extension. If money is owed on the tax extension, proof the amount owed is paid. The lender will want the transcripts from the IRS, but will typically waive that requirement and get transcripts from the previous two years instead knowing they can request the current year’s transcripts down the road (more on this in a moment). So long as the current year’s tax return copies aren’t showing any income that must be verified through transcripts (such as rental property income, part time business loss/profit), a W2 salaried employee can move forward with only a few hoops to jump through.
  • Everyone Else: This large category would include the self-employed, 1099 employees, and W2 employees that earn more than 25% of their income through commission and bonuses. In this category, not only does underwriting still need proof of filing/proof of extension (and proof of payment if taxes owed on an extension), but now tax transcripts must be made available. While an e-file means the IRS accepts the return instantly, the time between filing, accepting, processing the return, and making a tax transcript available can take several weeks. This timing definitely comes into play when scheduling a closing time on your new home purchase.

Now one thing you may be thinking to get around the transcripts is to file an extension. That works until October 15th! That said, the strategy won’t work if income is needed from the current tax year. It also may still require a P&L from the current tax year for some borrowers.

Planning on buying a home this Spring? Want to make sure there isn’t an unexpected delay on closing due to needing a tax transcript? Contact me today. We’ll make sure the timing is all planned out so we won’t be sitting around waiting for a transcript to become available.

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Home Buying Preparations – Income

January 5, 2016

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Welcome 2016! This time of year, people are busy making new year’s resolutions. Popular resolutions are losing weight, eating healthier, saving money, quit smoking, travel, spend more time with family… all of these have one thing in common. If you don’t have a plan, you won’t succeed. For example, no one would make the goal of exercising more on January 1st, and then run a marathon on January 2nd!

Buying a home involves a very similar process. You don’t just find a house and make an offer on it. You need a plan. You need to make sure your financial “house” is in order. Otherwise, you could be wasting time and risking your hard earned Earnest Money. Over the next few weeks, this blog will focus on three main aspects of preparing to buy a home through the prequalification process. Those aspects include income, credit, and assets for the down payment.

This week, we’ll focus on income by linking a few posts my colleague, Rodney Shaffer, wrote toward the end of 2015 in terms of qualifying to buy a home and income. These posts are not all inclusive as income from employment, bonuses, commission, self employed, 1099, child support, alimony, retirement, annuities, trust, disability, social security, tips, part time, asset-based income can be used when buying a home. Covering all of those at once would be an EPIC post, so we’ll stick with some common ones.

Overview – So How Much Money Do You Make

Salary or Hourly – Q: How to you earn? A: Hourly vs Salary

Commission* – Q: How do you earn? A: Commission income

*Note self employed and bonus income documentation is similar to commission with one exception. Self Employed borrowers can get by with only one year of tax returns instead of the two years required of commission and bonus income.

For non-traditional forms of income, such as child support, alimony, retirement, annuities, trust, disability, social security, the main qualifying aspect of these is stability. Currently, income “stability” for these types is considered to be any income stream lasting for 3 years after the closing date. Each one I just mentioned may have one small detail different from another, but the BIG unifying theme in all of these is the three-year continuance.

Don’t see your “type” of income listed? Have questions that aren’t answered? You are in luck. Contact me today, and we can discuss. If you are buying in the state of Georgia, I can help you get prequalified and ready to buy your new home.

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How to keep your loan approved – Income

August 4, 2015

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Yes, you can actually get your loan approved… and then do something to cause your loan closing to be delayed or maybe even unapproved altogether. This can be done with actions involving income, assets, and credit. In other words, every part of the loan process.

Over the next few posts, we’ll take a look at some things to avoid in each category. Today, we’ll start with income.

There is one thing to remember in this series. The examples being provided are ways the loan can be delayed or denied AFTER receiving loan approval.

Some of these may seem obvious, but they are worth mentioning.

  • Don’t quit a job: I know this one sounds really silly, but apparently it has happened enough that we must re-verify you are still employed on the day of closing. If you use income from your job to qualify for the loan, you probably don’t need to quit until after you own the home!
  • Don’t change jobs: Again, seems silly, but you would be surprised. If a great job opportunity comes up during the loan process, let your mortgage loan officer know. Together, we can work out the details of the change. What we want to avoid is becoming aware of this on the day of closing, and potentially cause a delay/denial of the loan.
  • Don’t change from a W2 salary position to another form of compensation: If someone moves from a W2 salary to full commission, we have lost that income for qualifying purposes. Borrowers who earn income through commission, bonuses, 1099 or are self employed require tax return(s) to verify income. If the switch is recent, that means there is no tax return history to verify the new income. That would mean we can’t use the income anymore, and may cause the loan to be denied.

Got a job transition coming up, and you are looking to buy in the state of Georgia? Contact me today. We can work through the job transition to ensure your closing isn’t delayed. The last thing we want is to make a silly mistake and cause problems putting you into your new home.

Let's not upset Mr. T!

Let’s not upset Mr. T!

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Loan Prequalification – Income

June 17, 2014

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Today is the third part of a four part series on the prequalification process. We started with credit scores, continued on to down payments, and today will focus on income. Generally speaking, I’ll divide income into three types – W-2 salaried employee, all other employment income, and other. We’ll start with the easy one.

W-2 salaried employees only need to provide pay stubs covering a 30 day period to qualify for a loan. Even if you just changed to a new job, as long as a 2 year continuous work history is established AND you have 30 days of pay stubs from the new job, you can qualify for the loan. Note that the loan process can start without the 30 days of pay stubs of pay stubs from the new job. Until the pay stub is available, an offer letter can be used for the initial underwriting of the loan.

What about “all other employment” income? Maybe the easiest way to separate the two is this… if you are a W-2 salaried employee working for a non-family member, 30 days of pay stubs are needed. If income from your job comes from anything else, chances are tax returns may be required. Examples would include W-2 employees who are employed by family member, rely on commission, or bonuses. The “all other” category would also include 1099 contract employees, full commission income, and self-employed borrowers. When tax returns are required, with today’s underwriting guidelines, you could not use year to date income to buy a home. The income that can be used is the amount filed on previous years tax returns. Since we are 2014, the tax returns for the years 2013 and 2012 could be used. In order to use income from 2014, those returns will need to be filed (meaning the earliest 2014 income can be used is the Spring of 2015).

The “other” category would include non-employment income such as social security, child support, alimony, investment income, retirement income, pensions, etc. Each of these are underwritten with different guidelines. Some of these, such as investment and retirement income, could have their own loan program. When planning to use income from a source other than current employment, definitely let your mortgage professional know.

I would be a great resource for the home buyer who is using income outside of the W-2 salaried category. For years, I would pre-underwrite my loan files prior to submitting them to underwriting. I know the differences between using investment income for buying a home versus the amount of investment assets that can be used for reserves. By knowing specifically what to look for when reviewing tax returns, bank statements, divorce settlements, etc., we should know prior to underwriting if there could be a problem with the loan. If you are buying in Georgia, contact me today to get going!

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Tax Day is here – now what?

April 15, 2014

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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.

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FHA mortgage insurance changes

September 27, 2010

Several weeks ago, President Obama signed a law giving the Department of Housing and Urban Development (HUD) the ability to make changes to the mortgage insurance on all FHA loans. While the law allows HUD to increase the mortgage insurance almost three times higher than its current level, it wasn’t until recently that the exact changes were known for the different FHA loan programs.

In the next few paragraphs, I aim to address those differences, provide some examples and insight into how this impacts individuals looking to buy or refinance a home using an FHA loan for all new case numbers assigned on October 4, 2010.

For all FHA loans, the up front mortgage insurance premium is being reduced from 2.25% to 1.00%, and the up front premium can still be rolled into the loan amount. Now, instead of an additional $4,500 being added into the loan on a $200,000 loan, that up front premium is now only $2,000. That is great news for everyone!

For FHA loans equal to or less than 15 years, the only real change starting on October 4, 2010 is the previously discussed reduction in the up front mortgage insurance premium. The monthly mortgage insurance premium for 15 year FHA loans with less than a 10% down payment (less than 10% equity for a refinance) remains at 0.25% with no monthly mortgage insurance for individuals putting more than 10% down (10%+ equity for a refinance).

The noticeable change takes place for all FHA loans greater than 15 years. In other words, the 30 year loan. The reduced up front premium obviously applies, but the monthly mortgage insurance premium will increase from 0.55% to 0.90% for loans with less than a 5% down payment (0.85% for loans with more than 5% down). Since most individuals using an FHA loan choose to go with the minimum down payment, let’s focus on the new monthly premium at 0.90%.

Let’s say you are buying a home using a 30 year fixed FHA loan. The purchase price is $250,000, and you are putting down the minimum down payment of 3.5%.

  • under the old scenario (2.25% up front & 0.55% monthly), the total loan amount would be $246,678 and the monthly principal, interest, and mortgage insurance payment at 4.500% would be $1360 ($1250 and $110 for mortgage insurance).
  • under the new scenario (1.00% up front & 0.90% monthly), the total loan amount would be $243,662 and the monthly principal, interest, and mortgage insurance payment at 4.500% would be $1415 ($1235 and $180 for mortgage insurance).

What are some of the noticeable differences:

  • the loan amount along with the principal and interest payment is lower under the new mortgage insurance guidelines
  • the monthly mortgage insurance is now significantly higher
  • the total monthly payment is higher, not significantly, but higher nonetheless

We’ve read the changes and looked at an example. Now let’s evaluate the potential impact of the changes:

  • regardless of using an FHA loan for a purchase or refinance, individuals with a lower debt to income ratio will hardly notice a difference at all. There is an increase on the total monthly payment, but roughly only 4% higher than the current set up.
  • the change will likely impact impact individuals yet to be prequalified or previously prequalified under the old mortgage insurance guidelines who have a higher debt to income ratio. Examples could include:
    • first time home buyers just entering the work force
    • someone who just changed to a new job
    • someone who recently had their rate of pay/type of pay changed (for example moving from salary to base + commission)
    • families with one income
    • higher consumer debt
    • not much credit card debt, but has student loans, car loans, etc.

As always, the key to making sure all is well is planning ahead. If you fit into one of those examples OR if it has been a while since you spoke with a mortgage consultant about getting prequalified, give me a call. I’d enjoy the chance to sit down and learn more about you, your situation, and ensure the FHA mortgage insurance changes do not hamper your ability to buy or refinance a home.

Type of income and prequalification

July 5, 2010

“Why does it matter how I’m paid as long as I get paid?”

I’ve received that question numerous times over the past several years being in the mortgage industry. The question does make sense – as long as income from a job is coming in on a regular basis, why does it matter if someone is self- employed, a W2 employee, or a 1099 contract worker?

Unfortunately, for the self-employed or individuals paid on a commission or bonus structure, it does matter. Why? Due to the up-and-down nature of running a business or income based on monthly/annual performance, underwriters want to see a historical record of income that is earned over the course of up to two years.

Unless you are a W2 employee whose salary will be the same every month regardless of the economy or sales, the only way to document your income is through annual federal tax returns. By reviewing tax returns for the past two years, an underwriter can see documented monthly income for 24 months to gauge expected future income.

Here are some examples of different ways one might be paid and what steps are necessary to document the income:

  • W2 salaried income – this is the easiest to document. All that is needed is the past 30 days of pay stubs. If recently moved to a new job in the same field still as a W2 employee, a pay stub reflecting 30 days on the job with an acceptance letter to the new position should do it.
  • W2 base pay with commission/bonus income – if commission/bonus income is less than 25% of the total salary, then the same rules apply as above should apply. If more than 25% of the total salary, then up to two years of tax returns will be required to document the income.
  • Full commission income – up to two years tax returns will be required. Note that any business expense write offs on the tax return will lower the income that can be used to qualify you for the loan.
  • Self-employed – two years of tax returns will be required. Again, any claimed business expenses (personal or for the business itself) will reduce the income that can be used to qualify you for the loan.
  • Bonus income – two years documented bonus income will be required along with documenting its continuance.
  • Same job at the same company but change from W2 salary to commission/bonus income – This is happening more frequently in the business world. Positions that were once salaried are becoming positions with base pay plus commission. If the base salary is sufficient to qualify for the loan, then only pay stubs are required. However, if the commission is also needed to qualify for the loan, then up to two years of tax returns would be required.

Loan programs such as stated income and no documentation loans are no more due to the credit crunch. This means all income must be verified and documented – making how one gets paid all the more important.

If you are looking to buy a home or refinance an existing one and you are not paid as a W2 salaried employee, it is imperative to speaking with a mortgage consultant to ensure everything is order before you are ready to make an offer. If you are in the state of Georgia, I would enjoy the chance to review your situation and help qualify you to buy a home–give me a call!