1099, taxes and mortgage loan

[Anonymous]

My husband is a 1099 employee.  He has been with this company 2 years.  Last year he "wrote off" quite a bit of his income because of mileage.  He is a regional sales manager and on the road weekly.  Obviously, that is going to be a problem when determining "how much we can afford".  He is goiing to do his taxes in 2 weeks.  He is going to talk to his accountant but I think we are just going to take the tax bullet, not write off much and pay the difference (if we owe any extra).  We have his contract stating his salary, comissions, mileage reimbursement and even a nice monthly expense check for medical benefits to offset his annual salary.   He has saved every check stub since he was hired and he is very meticulous with the paper work.

I didn't realize they calculate income for a 1099 employee differently in the mortgage process until tonight.  Any suggestions on how to proceed with taxes to prepare for the mortgage approval?

edited to add a little background on both of us:  He filed bk back in 2010;  discharged in 2011 with foreclosure on a house;  he has cleaned up his credit and scores vary from 675-700.  I have been on SSDI for 5 years due to medical issue found after an accident.  My annual income is $27k a yr.    Minimal credit because I never needed it, one medical collection of $150; credit scores 650-675 (eq will increase after 2008 dergo collection falls off in March or April).  Down payment for house: $25k  Debt - basically none.  He has a $280 car pmt and it will be paid off in June.  I paid cash for my car 4 yrs ago.  We pay credit cards off monthly.

[Revelate]

You've already figured it out I think: figure out the house price range you want, napkin math based on the DTI calculation (lender and loan programs do vary on this) and then limit your deductions to create an income which clears the DTI hurdle.

Your accountant can advise you, but there's nothing wrong with having a financially "awkward" moment other than perhaps a savvy UW wondering why you haven't fired your accountant yet .  It's your money, and the IRS will happily take it from you in this case if you let them, and the secondary market for mortgages won't care.  Being a 1099 contractor is great for many things until you have to apply for a mortgage.

[disdreamin]

Just curious - if he received mileage reimbursement (assuming it is for the full amount) how can he write off mileage? It sounds odd to me, but we always worked from home when we did 1099, so we wrote off expenses on our home office instead.

As far as mortgage, our original app had me W2 and SO 1099. They wanted everything - tax returns for 2 years, bank account details, etc. I don't know that doctoring one year to look right would've done us any good. Maybe it's different with the big lenders though. We used a small local bank that holds their own mortgages (never sells them), so that might be why the process was so different for us.

[StartingOver10]

There are some lenders that can do the loan with one year of tax returns, but most require two years and will average the income after business expenses.

The OP will probably have to provide exactly what your lender required disdreamin: bank statements, 1099s, tax returns (1 or 2 depending upon the lender and the program)

[Anonymous]

disdreamin - when you use your personal vehicle for business purposes, you can either itemize expenses related to that vehicle or the standard rate per mile.  I think the rate this year is 56 cents per mile driven.  He easily drives 500 - 1000 miles a week because he has a 6 state territory.  That adds up to huge amounts at the end of the year.  (example:   30k miles a year @ 56 cents a mile = $16,800 itemization for mileage) He also factors in his home office and travel expenses.  Obviously, it is great to limit how much we owe the IRS but it isn't so great when needing to verify income.  

I need to research a little more on how they look at the 1099 salaries for income verification.  Documentation for his bi-monthly paychecks definitely aren't going to match up with the tax return.  We would be nuts to say ok, he made $75k how much do we owe lol   We write a check to the IRS on a quarterly basis for taxes.  I need to look at that as well and see if it shows a reported income amount,  I know this can all be done and I might be making it more difficult than it is, I just want to be prepared.

[ShanetheMortgageMan]

1099 income is reported on Schedule C, as the person who is 1099'd is considered an independent contractor and thus is self-employed in the eyes of mortgage underwriting.  The qualifying income is the net income from Schedule C for the last 2 years tax returns, averaged if remains constant or increases, or just the most recent year's if it is decreasing.  There are certain items that can be added back into the net income, such as depletion, depreciation, and business use of home.

https://www.fanniemae.com/content/guide_form/1084.pdf is the form that is used when calculating income off of tax returns when doing a Fannie Mae conventional mortgage.

[disdreamin]

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@Anonymous wrote:

@disdreamin - when you use your personal vehicle for business purposes, you can either itemize expenses related to that vehicle or the standard rate per mile.  I think the rate this year is 56 cents per mile driven.  He easily drives 500 - 1000 miles a week because he has a 6 state territory.  That adds up to huge amounts at the end of the year.  (example:   30k miles a year @ 56 cents a mile = $16,800 itemization for mileage) He also factors in his home office and travel expenses.  Obviously, it is great to limit how much we owe the IRS but it isn't so great when needing to verify income.  

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I understand on the mileage, but you mentioned "mileage reimbursement" in your original post.  The way your first post read, it sort of sounded like there was mileage reimbursement, but you were also writing off mileage.  I guess I read it wrong.

When we did 1099, our net income from self-employment was always about 60% of our gross 1099 income (we had very few deductions).   Our mortgage lender did look at the two years and (I believe) averaged them.  YMMV, as the previous post pointed out.