It’s tax season, which means we’re getting a lot of questions regarding tax returns, tax refunds, and how these things can be utilized in the mortgage process. To address some of these questions, I’m joined by mortgage loan consultant Justin Allender in today’s video.
Tax refunds can be a great way to get a down payment or help you prepare for some of your closing costs. Before you spend your tax refund, though, talk to a mortgage professional so you can craft a strategy and talk about which collections or credits cards to pay off first.
I know you’ve heard that student loans are the No. 1 reason why I don’t sleep at night in my industry, but the No. 2 reason is tax returns. I always ask my self-employed borrowers to send me a copy of their tax returns when their accountant sends them back prior to filing with the IRS. There are certain deductions a self-employed borrower can take that, from a mortgage standpoint, can be added back in as income.
For example, someone might want to take the mileage on their vehicle that was used to drive to work (which is totally acceptable) and write off 55 cents per mile from an IRS standpoint. From a mortgage standpoint, though, you can only add back in 22 cents. Another deduction to speak with your accountant about is depreciation, because you get to add in every dollar of depreciation to qualifying income.
You can get creative, just make sure you have your loan officer on speed dial during tax season if you’re thinking about buying a home. Nobody likes to pay more income taxes than they have to, but if you’re telling the IRS you’re not making that income or aren’t paying taxes on it, you can’t then use that income for mortgage qualifying with qualified mortgage loan programs.
“Before you spend your tax refund, talk to a mortgage professional.”
What if you need 2019 tax transcripts for qualifying and closing? It typically takes the IRS six to eight weeks to process your tax returns once they’re filed so they can be available for your mortgage consultant. There is a way to give a certified copy of your tax return before that time period, but it requires jumping through a couple of hoops.
First of all, you can’t electronically file these taxes. The best thing you can do is take two copies of your returns to the nearest IRS office so they can be signed, stamped, and sent to your lender. I recommend making an appointment for this, especially during tax time—they don’t accept walk-ins. This is important because lenders are looking for documents that you filed with the IRS. In a way, we’re combating mortgage fraud and making sure we’re using the correct income calculation.
If you owe a tax liability, we’ll have to document that those funds have come out of your account, so you’d want to pay those while you’re there or file the installment agreement form with your IRS tax returns saying what you can pay.
So to reiterate, we can close without tax transcripts being sent out no matter what kind of borrower you are, but if you don’t do this process right the first time, you can’t go back and fix it.
If you have questions about income taxes, tax returns, or what you can do with your tax return money in terms of buying a house, don’t hesitate to reach out to me. I’d love to help you.