Profit and Loss Statements vs. Tax Returns

[Draco]

Hello,

My husband is employed and I am self employed running a business out of our home.  We are planning to start the mortgage application process but I am confused on how my income would be calculated.   I receive 1099-Ks from eBay and Amazon.  I also can show profit and loss statements for the business and regular payment deposits into my accounts.  Our taxes show a different number because I am able to take some deductions like home office deduction, milage driven for business, and health care premiums.  These items do not effect our profit and loss sheets but they do reduce my taxable income on my tax return.

My question is, would a loan officer accept 1099-K and profit and loss statements in lieu of Tax returns to verify self employed income?  If no, then is it legal to file an adjustment for the previous two years to reduce the amount of deductions I took in order to increase my self employed income.  I know it sounds kind of crazy (who would want to pay more money to the IRS?) but our rent is now just as high as a mortgage and we really want to purchase our home.

[llecs]

Your lender will look at schedule C on your 1040. If there's a profit, it'll be added to any other income you have. If a loss, then subtracted.  

Unfortunately when you claim these allowable deductions like utilities, rent, new computers, mileage, or whatever, it does reduce your overall income as seen by lenders (and IRS). We prepared for this issue by timing our home purchase around tax season. We were able to file our latest return and omit these deductions. We ended up paying thousands in taxes but we were able to explain the leap in income when asked by our lender.

[webhopper]

Unfortunately they will go by your reported income on the tax returns.

[StartingOver10]

In the heyday of the real estate market the lenders used to do "stated income loans" and NINA (No Income, No Asset) loans. Those type of loans were available because of banksters wanting to loan money to people that didn't have the income to support the new loan. You can see what happened as a result of that philosophy.

Your case may be different. But, the bank is now looking for your actual financials to see if you can afford the loan. It is more than just producing a P&L.

The lenders now want to make sure that the income is actually there. Not only do they want you to provide your two most recent tax returns, but they will also contact the IRS and ask for a tax transcript to make sure the returns you provide match the returns filed with the IRS. This is SOP for any mortgage loan today.

If you are obtaining the loan based primarily on your husbands w-2 income and your self-employment income is not needed to qualify, consider leaving your income off the application and having just your husband on the loan. When you have commission income or self-employment income the underwriting standards are much tougher than for people with just a w-2.

[imandy]

I can speak to this question exactly as I just closed yesterday and also have self employment from Ebay and Amazon!

First, this income has to go back two years. They need to verify this by ordering copies of your tax returns from the IRS, you will sign a release allowing them to do this. This will also send them copies of any adjustments you did which will do nothing but throw up red flags so do NOT do this!!

They will take Line 12 from your 1040 for 2010 and 2011 and average the two to determine your business income. If this does not go back two years you will not be able to claim ANYTHING but W2 income (until next year when you can show two years)

You will also need to write a letter to the underwriter explaining in one pharagraph your business and that you sell on ebay and amazon. Then you explain that periodic deposits from Paypal are deposited into your account for ebay sales and every 14 days there is an automatic ACH from Amazon.  On my conditional approval they asked to see more detail for two months so I printed a "Monthly Financial Summary" report from paypal for the last two months and I did a print screen of the last four settlements from Amazon on your Seller Central account. These "summaries" must have done the trick they never said anything further about it and I was clear to close 24 hours later.