Taking a lot of tax deductions can ruin a mortgage. No doubt about it.
It happens a lot. Tax returns are often done very well by tax professionals. As a result, your documented income is lower than what you actually take home. That’s great until you decide to buy a house.
Your banker tells you one of two things. Both come as a shock. You don’t qualify for a mortgage or for enough to buy the house you want. Even though you can afford to pay the mortgage you need for the house you want, you do not qualify. The reason is because your documented income is too low.
Banks require many things to get a mortgage. Proof of income is a primary requirement to get a loan. They must use tax returns to verify a borrower’s income. Because they require your last two tax returns to prove income, there is no remedy.
There was a solution to this problem. People used stated income and no income verification mortgages. Stated income is exactly that. You stated your income with no proof. No income verification loans required a specific down payment. There was no income verification and documentation was easy. Because there was so much fraud with these loans, they were eliminated.
Full documentation is a must today. This means tax returns as a minimum. As a result, you qualify for only what your documentation proves. This is why taking a lot of tax deductions can ruin a mortgage.
Before you fill out your tax returns this year, if you are thinking of buying a home or refinancing your current mortgage, get in touch with your banker to make sure what you want to deduct won’t make getting a mortgage impossible.
There’s another problem too. Debt to income ratios determine your mortgage rate. If your tax returns create a higher debt to income ratio, your mortgage rate will be greater. As a result, your monthly payment will be more. Think of it this way. Is it worth paying a bit more in taxes to save tens of thousands on your mortgage? The answer is Yes.
Now that tax season is getting underway, I thought it would be helpful to bring this Catch 22 situation to your attention. I know I sound at times like a broken record but it’s true. Because so many buyers refuse to go to a great banker, mistakes like this cost them a lot. A great banker counsels you correctly so you avoid such mistakes.
Call me at 201-741-8490 for advice or the name of a great banker.