When getting a mortgage there are three parts to qualifying: credit, income, and assets. The most challenging part of qualifying for home loan is determining the qualifying income because of the myriad of business industries, ownership structures, and compensation methods. The information below is to serve as a guide to how the mortgage industry views income and losses. This is not meant to be used as tax advice or instruct someone how to “work” the system. As always we encourage (and welcome) you to call us if you have any question as we’re happy to help.
Below is an outline of the types tax documents and tax schedules found in the income tax returns along with a brief description of each. Hopefully this provides insight why our Document Checklist is so extensive and why it’s so detailed. You’re welcome to use our DTI Calculator to see how much home you can afford once you get an estimate of your qualifying income.
1040 Personal Tax Returns
There are many schedules to a personal tax return and what schedules appear on your tax return just depends on your sources of income and losses.
W2 – everyone knows what a W2 is but a number of people wonder why we need the W2s if we’re getting the tax returns. The answer is because the gross amount listed on the 1040 doesn’t show us who made that money and from what employers. For we know you may have had four different employers in one year. Having the W2s allows us to verify past employment and income trends.
Schedule A / 2106 Unreimbursed Business Expenses – line 20 of the Schedule A shows the expenses that are itemized on the 2106 Form and there are times when we have to Count Schedule A Losses.
Schedule B – this is interest and dividend income and about 99.9% of the time this income can’t/won’t be used.
Schedule C – this is for Sole Proprietors that is self-employed. Check out our Schedule C Calculator to determine what your qualifying may be.
Schedule D – this is for capital gains and most often won’t be considered as income or as a loss. The gains and losses from the sale of equities (like stocks) will show up here.
Schedule E, page 1 – this is for Real Estate Owned (REO) and Royalties and the income (or losses) from this will absolutely impact your purchasing power. Check out our Schedule E Details for more information on what to use for income.
Schedule E, page 2 – this is where business entities (like LLC, S-Corp, C-Corp, and Partnerships) flow over to the personal tax return. A Self-Employment Income Analysis will need to be completed. Per the Document Checklist if you own 25% or more of any business then we will need all pages of those business tax returns as well.
Schedule F – this is farm income generated by farming or ranching. Yee Haw!
Businesses and the Self-Employed
Calculating the self-employed income is no easy task and the details certainly can’t be addressed in a blog. We have provided a guide for the Self-Employment Income Analysis but we highly recommend you contact us for an accurate assessment. We
Profit and Loss Statement
A Profit and Loss Statement (P&L – pronounced “P and L”) may be required if you’re self-employed and have not yet filed your tax returns for the previous year. This doesn’t happen often but could be required t0 substantiate a trend in a business’s growth pattern and help us determine your Qualifying Income.
As always, we highly recommend calling us and sending us your tax returns. We’re happy to calculate your qualifying income and determine what you qualify for.