A question that comes up quite often by potential borrowers is "I'm not self employed, why do you need my tax returns for a mortgage?" Now this may seem like a silly question to seasoned real estate and mortgage veterans. But the average home buyer may not realize what mortgage lenders look for when reviewing and analyzing tax returns.
We all know that self employed borrowers must submit tax returns when applying for a loan as that is the best and most accepted method for verifying their income. But there are many other reasons why lenders and more importantly underwriters require tax returns to be reviewed.
Even if you are a salaried W-2 employee, there are things that may show up on a tax return that could impact your qualifying income. For instance:
- Unreimbursed business expenses such as union dues, required uniforms, mileage, etc. are all examples of things that the employee must pay and is not reimbursed by their employer. Many times 100% commission employees such as loan officers will write off all their unreimbursed expenses which will decrease their qualifying income.
- Rental properties or 2nd homes. Lenders must determine if borrowers own rental properties or other real estate and whether or not those properties have positive or negative cash flow. Some borrowers don't disclose rentals on their application if they don't owe anything on it and they don't need the rental income to qualify. But the lender wants to know any and all real estate owned by a borrower.
- Capital Gains or Losses. If there are on-going gains or losses this could positively or negatively impact a borrower's income.
- To verify other sources of income such as interest/dividend, alimony or retirement income.
- Ensure no self employment when none was disclosed. Again, some borrowers may run a side business or be involved in a partnership in addition to their full time job. The borrower may think this is insignificant as there is not much income being declared, if any, but this business may be a way for the borrower to write off some expenses and therefore lower their taxable income. This is great for lowering taxable income and reducing federal and state taxes but it could also lower qualifying income for the loan.
- Alimony paid. A borrower may fail to report that they pay alimony but it may show up on their tax return as a way to lower their taxable income.
These are just some reasons why lenders need to review borrowers' tax returns. So the next time you're asked why does my lender need my tax returns, you'll be able to provide your buyer with a good answer.