As accountants, we may not have the title of loan officers, mortgage originators, or real estate agents. However, we are asked to assist with the home purchase process so much that we have experience in each of these phases:
- Initial qualification for a loan
- What income profiles, tax profiles, and income sources tend to qualify for the most seamless mortgage process
- Which items the loan officer needs to see
We are also fluent in tax planning & optimization for each phase of the home ownership lifecycle, from the initial purchase, to dispositions, inheritances, conversions to a rental, etc.
Today I will focus specifically on loan qualification from a tax & accounting perspective:
- For business owners, freelancers, contractors, 1099-NEC employees:
- For you, the tendency is to deduct as much as legally possible to decrease your tax obligation. However, for loan purposes, the bank wants to see a steady stream of income. The higher the income, the larger the possible mortgage you may qualify for. However, this does lead to a higher tax obligation. This is a balancing act that each person must consider for themselves.
- It may make sense to “equalize” your income by restructuring your income to be a “business,” such as an s-corp, then running payroll. Banks love to see W2 wage income and a steady income stream.
- If you are going to restructure your income stream as a business, the earlier you start, the better. Even if it is the same source of income, the banks will often view different companies as a different stop/start to your income, which affects what you may qualify for
- For W2 wage employees:
- Maintain a Stable Employment History – Lenders prefer borrowers with a stable job history. Avoid frequent job changes leading up to your home loan application.
- Keep any W2s, 1099s, or other records from past employers
- For everyone
- Make sure to have your taxes filed! We are often contacted by panicked potential homeowners saying they need to have their returns filed immediately in order to purchase their home. However, the loan company often needs to see IRS transcripts, which may take weeks or even months to appear in the IRS system. With this in mind, if you expect to be applying for a home loan anytime in the next year, get any back tax issues handled immediately – do not underestimate the IRS’s ability to delay proof of filing.
- Use a professional that you trust with a solid business, where possible. This will ensure that they are available to answer the lender’s questions about your taxes. We are often contacted by taxpayers who need a CPA letter to confirm their employment, their returns, or other aspects of their financial profile. If we have not worked with them, their financials may be tough to “certify” without additional due diligence on our end.
There are, of course, many non-tax related considerations, such as having liquid assets, your debt to income ratio, credit score, etc., so this above list is not exhaustive – this is only to highlight the main tax-related considerations. If you want a full outline of all loan-related tips, please let me know & I can send you a more comprehensive list.
If you need assistance with any of the above, even for question/answer sessions or tax optimization related to other phases of home ownership, please let me know. Please kindly schedule in the next week since we are heading into year-end planning season & spots are already filling for this.
George Dimov CPA
(833) 829-1120 toll free