Posts Tagged ‘tax returns’

Mortgages and Filing Tax Returns

March 22, 2016


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.


The possible end of short sales – an annual tradition

December 16, 2013


It seems like a year ago this scenario was making rounds in headlines. Well, that is because it was in the headlines.

When a home is sold as a short sale, the seller (former homeowner) receives a 1099 for the difference of what is owed on the home they just sold versus the amount they sold the home for in the short sale. For example… a seller owes $300,000 on a home that sells as a short sale for $200,000. The seller receives a 1099 from the bank for the difference of $100,000. That difference of $100,000 is taxable income due to the IRS. The seller could have a tax liability around $25,000 owed to the IRS.

This nightmare scenario for homeowners underwater and attempting to short sale their home has not been a problem over the past several years. The Mortgage Debt Forgiveness Act passed in 2007 allowed short selling homeowners to not be liable for the difference of what is owed from the sale of their former home. This Act expired at the end of 2012, but was extended by Congress for an additional year.

Since Congress is basically done for 2013, and didn’t agree on a lot over the course of the year, this Act will expire at the end of the year. The one hope homeowners still in the short sale process have is that Congress will reconvene in 2014 and extend the Mortgage Debt Forgiveness Act retroactively for another year. If Congress fails to do this, then the debt forgiven by the bank on short sales becomes taxable income for the seller on their next tax return.

Since short sellers already face financial hardships (thus the reason for the short sale in the first place), this would not be welcome news as their choices would be a short sale with a tax liability OR foreclosure/bankruptcy.

Hopefully Congress can begin agreeing and working together a little better in the coming year. Extending the Mortgage Debt Forgiveness Act seems like a “win” for both sides. Let’s see how it all unfolds in 2014.


The end of short sales?

November 8, 2012

Homes being sold as “short sales” have increased over the last few years. A short sale is when a bank agrees to sell a home for less than what is owed on the current mortgage. It has been a driving force for some homeowners to get out of an underwater situation on their current home.

What many people do not know is that going through a short sale could result in additional income on your taxes. Let me explain. If you sell a home for $100,000, but you owed $150,000, you will receive a 1099 showing “income to you” at $50,000. The debt is forgiven by the bank (in most cases) on a short sale, but the IRS views the difference as taxable income. Depending on your tax bracket, this could result in taxes owed in excess of $10,000.

This scenario has NOT been a problem since 2007. Homeowners selling their homes as a short sale property have not needed to report the difference as income on their tax returns. Why? The Mortgage Debt Forgiveness Relief Act allows homeowners to be exempt from taxes on the difference between the purchase price and amount owned on a home when selling their homes as a short sale.

The Mortgage Debt Forgiveness Relief Act expires at the end of the year. If it isn’t extended, homeowners will be required to file their taxes with the difference as taxable income. This will cut down on the number of short sales as homeowners may turn to foreclosure and/or bankruptcy.

It will be interesting to see how this works itself out between now and the end of the year.

If you are selling a home as a short sale, you need to work now to do whatever you can to ensure the home closes before the end of the year as their is no guarantee of an extension to this act.

Happy Tax Day: Just Write it Off (Jerry).

April 15, 2010

The mortgage business is actually quite straight-forward.

The underwriters who work in the business and the bankers who control the business of lending people hundreds of thousands of dollars are generally methodical, detail oriented, by-the-book, risk-adverse, kind of people.

In an effort to ditch the stuffy-banker image, six or eight or ten years ago, mortgage brokers started marketing the idea of “creative financing” . . . and “creative financing” was supposed to mean that as a broker, I can do loans that the bank can’t do = stated-income loans, no-doc loans, 80-10-10’s, 100% financing, stated-income stated-asset loans, interest-only loans, etc.  However, too many mortgage professionals (the brokers doing the loans and some of the wholesale account reps whose companies were buying the loans) took the word “creative” to mean something a little (a lot) different.  I know, because I lost the business of a handful of borrowers over the years (13 years, ouch) because I was not willing to be “creative” . . . as in, borrower: “well, can’t you just ignore _____ [this or that].”

The over-creativeness of the mortgage business (by the way, don’t look at me) and the crazy-liberal mortgage underwriting guidelines of the past few years (can you believe there used to be a “stated income W2 loan” available?  The lender realizes that the borrower is W2, but will allow them to state their income for qualifying purposes.  I never did one, but referred to them as the “liar loan”) are in large part to blame for the economic debacle that the U.S. is current experiencing (NOT predatory lending — which is what the media and D.C. may want you to believe).

Uh . . . I thought we were going to talk about tax returns??  Sorry.  Keep reading . . .

So, most people understand that the mortgage underwriting pendulum has swung — guidelines are more strict, lenders are more credit score sensitive, downpayment requirements are higher, etc.  BUT, for some reason, most people are surprised (and often quite angry) to find out that there is NO room for creativity when it comes to tax returns.

Your tax returns are your qualifying income.  End of story.

“Well . . . ,” you ask ” . . . what about write-offs?”

With the exception of depreciating assets (which we can add back to qualifying income) and health insurance costs (which can be added back) and a few other things that can be added back to someone’s income for qualifying purposes— a “write-off” is really just a cost of doing business.  If you were selling widgets and made $100 per widget, but it cost you $25 to make the widget (a $25 loss per $100 made), it wouldn’t be fair for the IRS to tax your income at $100 per widget.  Your income would only be taxed at $75 per widget.

So, if you “write-off” the cost of business travel, food and entertainment, or mileage for work, or advertising costs, website design, etc., those costs are costs of doing business.  In other words, if your business made $80,000 in gross receipts (income), but it cost you $20,000 in business expenses (in write-offs) to make the $80,000 . . . then your qualifying income (the income left-over and available to make the mortgage payment and pay the bills) equals $80,000 — $20,000 = $60,000.  The underwriter determines from your tax returns, that in order for you to make $80,000, you have to spend $20,000.

Now, if you made more than $80,000 OR if you actually spent less than $20,000 . . . well . . . it may be that you or your accountant is . . . well . . . more than simply creative.