Out of the many changes that have impacted the mortgage industry, this is one change that has and will catch many New Jersey borrowers completely by surprise.
Here’s why. When applying for a mortgage loan, borrowers must provide a copy of their most recent Federal tax return – the complete return with all forms and schedules. In some cases, two years of returns may be required.
Once upon a time, only self-employed borrowers had to submit returns. No longer. It now applies to all applicants. The reason for this is two-fold:
- Tax returns will assist in determining whether the borrower is taking tax-writeoffs that affect income used for mortgage qualifying.
- Showing tax returns will prevent fraud and abuse.
In addition to providing a paper copy of the return, borrowers must also sign a form that allows the lender to obtain the borrower’s tax transcripts directly from the IRS – and the lender will do just that. So the borrower should NEVER give thought to creating a false return for purposes of deceiving the lender.
Tax returns raise these 3 most serious issues:
- There may be excessive unreimbursed employee business expenses. These expenses will reduce your gross income dollar-for-dollar.
- If the borrower is partially or totally self-employed, business losses and expenses can affect income used for qualifying.
- Where borrower-owned property is rented with related expenses taken as tax deductions, this can also affect income used for qualifying.
What should borrowers do to avoid problems?
In getting pre-qualified, be certain you disclose your total financial picture to your Loan Consultant. That’s especially the case if you are primarily a W-2 employee but has self-employment income on the side. Your tax returns won’t be requested until you get further into the mortgage process, so it is critical that these details are disclosed at the time the application is taken. This will avoid using income that is higher than what will eventually be used for underwriting.
In addition, get prepared for buying or refinancing your home. Cut back on credit card use, lower the balances on credit cards until no one card has a balance that exceeds 40% of the credit limit. Do not make any other large purchases close to the time you apply for your mortgage. The mistake many borrowers make is buying a new car before the loan closes. Even with a pre-approval or pre-qualification, your loan can be denied at the last minute if your debts have changed significantly since application.
Some borrowers find the new mortgage guidelines intrusive. Well, things certainly are very different. However, if you want to buy a home or refinance, these are the rules of the day and no one is exempt. The only alternative you have is to pay cash. Cash is king. But if you must borrow several hundred thousand dollars, as most do, then we must play by these new rules.
Share the details of your financial picture with your lender, and getting your mortgage in New Jersey should be successful.
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I never heard about this. We plan to buy a home later this year. I hope you don’t mind if I call for more clarity. My husband does a side business & takes a lot of write-offs on a schedule C. Seems you’re saying this could be a problem.