Evaluating and using Tax Returns for Mortgage Financing (part 2)

Mortgage and Lending with Bank of Oregon a division of Willamette Valley Bank

Evaluating and using Tax Returns for Mortgage Financing - Part 2


I posted this part one and two series a few months ago.  Some recent conversations with some Realtors and clients spurred me to repost some of this information as it appears there are some misconceptions as to how income gets calculated when using tax returns.


In Part One, we addressed how rental income is evaluated in terms of qualifying for mortgage financing.  Here in Part 2, let's delve into this whole issue of using tax returns for mortgage financing, and evaluating those return schedules, a little deeper.


I was recently challenged with having to qualify a borrower who has some fairly complicated returns.  His income is derived from a variety of sources: rental income, IRA distributions, Interest income, Capital Gains and Social Security earnings.  So once again, it's generally required that when using tax returns for mortgage financing the two most current consecutive years will be used.  The biggest challenge I faced when looking at these returns is that there was very little consistency when comparing the 2008 and 2009 returns. Here is the 1084 form and 1088 form that the lender will utilize to evaluate those tax returns for mortgage financing.



My client's 2008 return reported Taxable Interest (Line 8a on the 1040), IRA Distribution (Line 15a), Rental Income (again, line 17 from Schedule e) and Social Security Income (Line 20b).  Typically underwriting, in order to determine qualifying income, would generally require that the following year's 2009 return would have hopefully similar or increased earnings for each reportable category.Karen Burket Bank of Oregon Home Loans


Unfortunately, in this case, come the filing of the 2009 returns, things changed.  Not only had their taxable interest decreased (showing declining income is typically unfavorable when evaluating tax returns for mortgage financing) but in 2009 there were no IRA distributions either.

Karen Burket Bank of Oregon Home Loans

So, since these were people of retirement age, an underwriter is going to want to know what retirement income they should expect for that year, in order to determine a two year average.  Instead, for 2009 the client now had reported capital gain income.


Here were the challenges we faced.  Since we had different "types" of income being reported, it made it impossible to document a two year history for those specified earnings categories.  Capital gain income is many times viewed very conservatively by the lender as well, as typically, a Capital Gain is just a "one time thing", generally received due to the sale of real estate.  In this case however, the Capital Gain income was derived due to a sale in stock.  Many lender guidelines suggest that Capital Gain Income may only be used as a "secondary source" of income, and therefore, they limit the percentage of earnings to anywhere from 20-40% of their other actual income.  In this case, the Capital Gain income was by far the majority of income that was reported in 2009.


So, while their 2009 income increased dramatically over what was reported in 2008, doing a typical two year average didn't work in this scenario as the Capital Gain income hadn't been consistent from year to year.Karen Burket Bank of Oregon Home Loan


It's important for borrowers, who rely on using tax returns for mortgage financing, to understand one very important factor.  A lender is going to want to see consistency.  I cannot stress that enough.  It should also be noted that a significant decrease in income from past year to present year can also have a negative effect when seeking mortgage financing.  In that case, an underwriter may decide to just use the current year's reportable earnings and just use a twelve month figure, rather than factoring in the prior year's higher earnings.

For you folks out there who have several schedules that get included with your 1040's and you are relying on using those tax returns for mortgage financing, I hope you find this information useful.

While what I've outlined above is current industry protocol, we are seeing lots of changes with regards to underwriting standards and guidelines.  If you are self employed, or have income outside of W-2 wages, contact me immediately for your mortgage needs before there is another shift with regard to how tax returns for mortgage financing are analyzed.  Analyzing your returns and getting you prequalified are completely complimentary!

Contact me now!  I can lend in all 50 States! 


This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Lending / Financial
Addicted to Active Rain
Dedicated Bloggers
The Lounge at Active Rain
tax returns
mortgage financing
self employed
rental income
ira distributions
interest income
capital gains
social security
karen burket

Spam prevention
Show All Comments
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Karen, this is great information for those starting to focus on their tax returns.

Jan 18, 2011 10:08 AM #1
Karen Burket
Bank of Oregon a division of Willamette Valley Bank - Medford, OR
Valley Mortgage Grou, Conventional, FHA, VA, mortgages

Thank you, Connie!  Appreciate you reading and commenting and my apologies that I didn't respond to you until now.  MY BAD!



Feb 02, 2011 08:41 AM #2
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?


Karen Burket

Valley Mortgage Grou, Conventional, FHA, VA, mortgages
Ask me a question

Additional Information