Just the other week, I had an associate tell me that he felt like jumping off a bridge.
“Why the leap of faith? ” I ask.
After 10 minutes of rambling on how he spent 3+ months working with a couple that finally saved up enough money to buy their first home and at the VERY end, had the financing entirely fall apart, he finally came clean and said, “Tommy, I didn’t look at the tax returns. I screwed up bad.”
You bet these people’s house you didn’t, my friend!!!
For all of you “soon-to-be-buyers”, you need to understand how your income is magically deciphered when looked at by mortgage underwriters. It’s not rocket science, but did you know that your Adjusted Gross Income (AGI) can quickly change if not accounted for properly?
Say you are a W-2 employee with a base salary of $65,000 a year. Well to the average mortgage guy, they take that figure, divide by 52 (weeks in year), and multiply by 4 (weeks in month) to come up with a gross monthly income ($5,000) for you to qualify off of.
Bingo, Bango, you’re APPROVED for that $150k home you fell in love with on Saturday!
Not so fast.
What is that you say? You deducted $5k in gas expenses and $1k in cell phone charges (900 numbers apply), in which your employer did not reimburse you on these business expenses? Well believe it or not, that figure is now SUBTRACTED from your AGI (Adjusted Gross Income-shown on page 1 of your IRS FORM 1040) and now the Loan Approval has to be completely reworked.
If you don’t know what a 1040 is, either you’re reading this in jail or new to the country. Welcome! Dance of Joy time!
Well what the 1040 basically shows is the amount that you made in that calendar year; however, it can be increased or decreased depending on the rest of your tax schedules.
This is where our “Mortgage Wizard” went wrong!
99% of lenders these days will order your tax returns prior to closing, and if anything like this pops up and screws up your original approval, stick a fork in the loan, you’re done with!
So what’s the moral of the story?
- Make sure to give your tax returns (last 2 years) to your loan officer AT APPLICATION.
- If you are planning on buying a house in the near future, don’t deduct as much as you normally do tax time. While it’s a great feeling getting a nice fat check back, it’s an even better feeling owning a home.