Profile picture for xunkn0vvnx

The more deductions you claim, the less a bank will lend to you?

Would it necessarily be true that the more deductions you claim on your tax return the less a bank will lend to you because of your lower taxable income?

So therefore, isn't this technically a catch 22 situation where you would like to claim more deductions but technically shouldn't if you would like to buy a property in the future because the bank will lend you less money because of the reduction in your taxable income?
  • April 26 2011 - Platinum Triangle
  • 0
    0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

Answers (9)

Deductions that would decrease your income and may of course affect your plans of getting a higher loan for your income bracket would surely fall. 
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

It's the total income you report that's important.  Many self-employed people try to show as little income as possible and that does hurt them when they need to borrow.   
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

There are some great answers below. I'll just add a couple of thoughts.

....Most of the time if hear a consumer talk about having too many deductions and qualifying for a mortgage, its when they are self-employed. A schedule-C type Borrower or a someone that has a corporation.

It becomes a problem when these individuals take expenses (deductions) too far. They write-off the baseball trips, groceries, the re-model to their master bathroom, etc., etc. Their "net income" is so low that they can't qualify for the mortgage they want. I had a person call who said that he made $100,000/yr. When I saw his Schedule-C, his "qualifying income" was so low that is was a real shock!

Therefore, it's best for everyone to simply deduct true business expenses and focus on increasing the revenue side of the equation.

I hope this helps!

  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Dittos to Michael's post. How are you paid, W-2, 1099, or own your own company? Do you own more than 1 house?
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Standard deductions most tax payers claim do NOT effect your ability to qualify.  If you are thinking about the deductions you take on Schedule A, don't worry about it - with ONE exception. If you claim un-reimbursed business expenses on Form 2106 that will reduce your income for qualifying.

Where applicants harm themselves (for qualifying purposes anyway) is when they are self-employed and they write off more than legitimate business expenses.

For example, I once had a borrower whose main hobbies were paint balling and racing mini karts. Guess what he did? He painted his company name across the sides of the Karts and then claimed both as "business expenses," even though in reality those had nothing to do with the profitable operating of his business.

The point being - if you are going to take advantage of IRS loopholes for preferential tax treatment why should the lender then ignore those items you claimed as business expenses?

You have not indicated whether the deductions you are worried about or personal deductions (Schedule A) or business deductions. If they are personal (exception being Form 2106) then don't worry about it. If they are business expenses then the lender should rightfully lower your income by those amounts - without those expenses you wouldn't have a business.  :)

If you have any more questions about specific deductions feel free to post back here or you can contact us via our profile.
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Realtor Kay Lee
Technically, it's not about the deduction in and of itself. It's about how much income you are claiming. The more you deduct, the less you are making on paper. The less you make, the less you can borrow.
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

It isn't always the case. Depending on the deductions, some of them are entered back into your income for underwriting purposes. When you take deductions for your mileage, child tax credits and depreciation on real or personal property, they put it back into your income for calculating your ratios.
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

100% correct with certain deductions... so it isn't that simple. Deductions against real estate income (like including your cell phone or internet bill against your rental income, car mileage, flights if it is out of town) will reduce your rental "income" and hence the amount you can borrow. 

Taxable income isn't the issue. Underwriting looks at your gross income, and includes rental property income (adding back depreciation) less all personal mortgages, credit card or car payments, etc. Plus adds business income or any other income above the line (for the most part).

So it gets a little confusing and you really need a tax person to help.

But answer your question in an easier way. Yes, the more deductions you take against your property the lower the income and the less you can finance. As a side note deductions like standard or itemized deductions are not relevant to the calculation.

Thanks.
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for wetdawgs
You are correct.  The less income your report on your tax returns, the less you can borrow.     Rather than a catch 22, I think of as an example where the tax codes have gone crazy allowing individuals to deduct dollars yet thinking that they have that money to spend elsewhere.      Let's all work on getting our reps to start revising the tax codes so a deduction means you have really spent the money.
  • April 26 2011
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.