In his blog this week, mortgage broker Dennis C. Smith of Stratis Financial in Huntington Beach explains how home loans are set for people who have their own businesses, work on commission or own a part of another company …. and how submitting a phony tax return won’t work:
Q.: “I’m self-employed. How is my income calculated for qualifying for a new mortgage?”
A.: “I will expand the answer to include not only self-employed but also anyone who owns 25% or more in a company, those receiving commission income and those whose bonus income (yes some people are still getting bonuses) exceeds 20-25% of their base income.
“4506-T is an IRS form that all lenders use to verify that the tax returns you provide for your mortgage application are the same ones you have submitted to the IRS. With the software available in the market to prepare tax returns it is quite simple for someone to quickly make some tax returns that result in necessary income to qualify. On every mortgage with tax returns in the file the lender will verify the forms with the 4506-T, and yes, there are still borrowers and loan officers in the market submitting fake tax returns.
“Self-employed borrowers, including those with an S Corporation, LLC or Sole Partnership, will need previous two years tax returns. All schedules will be reviewed and added back to the adjusted gross income will be any depreciation deducted as an expense. A two year average will be used to determine monthly income. If you have declining income then the lower income will be used; i.e. in 2008 you filed for income of $75,000 and in 2009 you filed for $69,000; we would use $69,000 for your income.
“Rental Income: two years of Schedule E income from your tax returns. If the property was placed into service in the most recent year then we can use that year’s taxes.
“Commission/Bonus Income: If you receive ’substantial’ income, generally defined as 25% of your total income (but some underwriters now dropping to 20%), from bonuses or commissions we will need the most recent two years’ federal tax returns. Mostly we are interested in any unreimbursed business expenses filed on Schedule A (also known as 2106 expenses). These expenses will be deducted from your gross income and then the income averaged for the two year period.
“Unless you are a straight salary, W2, employee you should be prepared to provide your most recent two years tax returns with all schedules to determine your qualifying income for a new mortgage. A note at this time of year: taxes are due in a little over two weeks, if you are closing after April 15th be prepared to provide your 2009 returns, or a copy of the extension.
“Regarding the 4506-T form and the current time of year. If you file by mail it can take weeks for the IRS to verify that you have filed your returns. To speed up the verification process you can either file electronically, which will still take time to confirm filing but not as long as by mail, or drive your returns to your nearest IRS office and deliver them and request a receipt/verification your forms have been filed.”