Will this be an issue in obtaining a mortgage? Tax return AGI

[Anonymous]

Hello All!

I need a mortgage loan expert on this one. Maybe Shane or Dallas could answer this one, but anyone with knowledge regarding this issue can chime in!

I was filling out my pre-approval paperwork today and was struck with a concern. My LO stated that she needs W2's, pay stubs and tax returns. I make a pretty decent income, but I also had a side business. It has not been too profitable over the past couple of years, so it shows as a loss on my tax return. It is not a loss in income, however. The main loss comes in with the amount of miles that I have had to travel. I think that it's something like 48 cents a mile. I drove  alot of miles, so that reduced my income a bit on my tax return. My pay stubs and w2 shows what I make on my primary job.

Also, since I work for the govt., my health insurance premiums and 401K deductions are taken out pre-tax, thereby reducing my taxable income.

My question is: Will this be a problem when it comes to income qualifications? I sure hope not! I am so close. Maybe a month or so. I would think that it would be obvious what my salary is based on check stubs and w2's.

Thanks again for your help!!

Jelly

[Anonymous]

To answer your question, yes, this will hurt you.  You can not claim expenses and then qualify on non adjusted income.  The fact is that if you had to drive that many miles for a side business that was loosing money, it did reduce your income (unless you were not claiming income legally) becuase you had more expenses than you had income from the side job.  As Dallas is fond of saying, "you can't have your cake and eat it to".

[DallasLoanGuy]

And..... They WILL pull tax transcripts.....

[Anonymous]

---

@Anonymous wrote:

To answer your question, yes, this will hurt you.  You can not claim expenses and then qualify on non adjusted income.  The fact is that if you had to drive that many miles for a side business that was loosing money, it did reduce your income (unless you were not claiming income legally) becuase you had more expenses than you had income from the side job.  As Dallas is fond of saying, "you can't have your cake and eat it to".

---

What do you mean by this? I had the type of side business where I drove to do presentations in hopes that I would make multiple sales on my product. Sometimes it was good...sometimes it wasn't. I submitted w2's from my primary job and a Schedule C for the business with my tax return, showing that my biggest loss was the mileage. I claimed ALL income from this business, it just wasn't a lot. I didn't make a lot of money from this to begin with. I was hoping that it would pick up, but as we all know, the recession hit. Obviously, I won't be continuing this venture, but I really hope that I can still get a mortgage approval.

[Anonymous]

---

@DallasLoanGuy wrote:

And..... They WILL pull tax transcripts.....

---

I don't quite understand, Dallas. I will submit all of my tax returns, w2's and check stubs to the LO. I submitted a Schedule C with my tax return, so all of this information is documented with the IRS. As I mentioned to mickie, I claimed ALL of my income on my tax returns. I just didn't make much from the side business. I didn't put out a lot of money to operate this business, I just travelled to wherever I thought I could make a sale. It just wasn't lucrative. Needless to say, I have since, "closed" this business.

It just seems a bit unfair that a mileage deduction would make me unable to obtain a mortgage. I have been at the same job for over 16 years, and I make a decent salary. Not great, but certainly decent. Won't that count for something?

Thanks for your input! 

[Lel]

The issue here is that if you have a loss from your side business, and claimed this loss to reduce your income tax liability, you can't turn around and argue that your income for mortgage qualifying is only your regular W-2 job.

For example, let's say I have a regular job that pays be $60,000 a year.  However, I have a side job that isn't profitable, and I claim a $10,000 loss from this enterprise.  It might not be actual outlays of money, but depreciation of assets, mileage expenses, etc.  Regardless of the nature of the loss, I have asserted that I have lost this money, and thus my taxable income is only $50,000.

If I want to apply for a mortgage, I have to acknowledge that my income was just $50,000.  I can't say that my income is really $60,000 for mortgage qualifying purposes.  I have stated that I lost money on my side job, and that's how the mortgage folks are going to consider this as well.

From what you've written, it sounds like your schedule C losses are pretty minimal.  If so, then it shouldn't make a huge difference in your ability to qualify for a loan.

Basically, you can't claim to have lost money on the one hand (and benefit from a reduced income tax liability) and then on the other hand state that you didn't really lose this money when you apply for a mortgage.

[Anonymous]

---

@Lel wrote:

The issue here is that if you have a loss from your side business, and claimed this loss to reduce your income tax liability, you can't turn around and argue that your income for mortgage qualifying is only your regular W-2 job.

For example, let's say I have a regular job that pays be $60,000 a year.  However, I have a side job that isn't profitable, and I claim a $10,000 loss from this enterprise.  It might not be actual outlays of money, but depreciation of assets, mileage expenses, etc.  Regardless of the nature of the loss, I have asserted that I have lost this money, and thus my taxable income is only $50,000.

If I want to apply for a mortgage, I have to acknowledge that my income was just $50,000.  I can't say that my income is really $60,000 for mortgage qualifying purposes.  I have stated that I lost money on my side job, and that's how the mortgage folks are going to consider this as well.

From what you've written, it sounds like your schedule C losses are pretty minimal.  If so, then it shouldn't make a huge difference in your ability to qualify for a loan.

Basically, you can't claim to have lost money on the one hand (and benefit from a reduced income tax liability) and then on the other hand state that you didn't really lose this money when you apply for a mortgage.

---

I did drive quite a few miles, so the mileage is the primary deduction on my Schedule C. No real loss of income...financially, I pretty much broke even. But, if what you are saying is true, I can forget about getting a mortgage, because my taxable income was reduced so much. Question: If the LO is going to determine income based on the tax return, then why do they also require w2's and check stubs?

Thanks so much for your input!!!  

[Anonymous]

w2 and check stubs are for employment verification and "quickie" pre-approval or initial documentation.  They request you to give copies of your tax forms to determine final allowable income and to re-verify given information from w2, etc (w2 and paystubs are too easy to fake).  They then request tax transcripts from the IRS to make sure that balances are not still owed on taxes and that all final info is correct.

[Anonymous]

---

@Anonymous wrote:

w2 and check stubs are for employment verification and "quickie" pre-approval or initial documentation.  They request you to give copies of your tax forms to determine final allowable income and to re-verify given information from w2, etc (w2 and paystubs are too easy to fake).  They then request tax transcripts from the IRS to make sure that balances are not still owed on taxes and that all final info is correct.

---

Thanks for the reply!! I am still going to go for it...next month in fact, but I will have a plan B. I live in a VERY small apt. w/out a washer and dryer. I stuck it out, because after Hurricane Katrina, the rents were soooo high! And I knew that I would be looking for a house, as soon as I couId afford it. I just can't take living in that apt another whole year. If I am not able to purchase my first home this year, then it's not God's will. I will keep working on improving my score and saving more money, and then I'll try again in a year. While I wait, I'll be in a MUCH larger apartment that includes a w/d or at least the hookups. LOL!!!!

Thanks again for the info. I'll let you know what happens after I meet with the LO next month. I plan to go on May 10th.

Jelly

[Anonymous]

You know that doesn't exactly sound like it makes sense. My 1040 "wages" on the top line are about 10K under my actual pay due to 401k contributions. You wont see those 401k numbers on the tax forms at all, the only place it appears is on the paystubs and on the W-2 under box 12 (description code D). And it's a sizeable amount of money (around 10% of my income). There's no way in the world my income should be considered less because of that, but, if you just use the tax returns, you would not see my actual income. I guess you might have a better idea of it by looking at the Medicare taxed income as nothing is deductible from that, but once again you'd need the W-2 to see that.

It doesn't really make sense unless they are taking your straight gross income per W-2's. I'm guessing that with something like a side business that has lost money you would have to go through some sort of manual underwriting since it's a bit of a judgement call (has it actually cost you out of pocket money, or is it just depreciation etc as people have pointed out).

I also disagree that W-2's are easy to fake, if your company uses one of the bigger companies for payroll processing it would be trivial to verify - and most of those companies file W-2 data electronically with the government as well.