I see it time and time again. Self-employed individuals who make a game of writing off as much income as possible. (No. I'm not poking at Real Estate agents--in particular.)
My hypothetical client owns an auto repair shop. He's a sole proprietor. The business actually has a lovely annual income, which he then writes off nearly every penny of. He even writes off his house payment. No big deal you say. After all, the money gods did create the stated income loan for just such a scenario did they not?
True, true. They did. However, the Fed gods countered with the form 4506. i.e. Let's see what they tell Uncle Sam they make after all those expenses. This is what the loan originator and banks have to live with today.
So, the outcome for Mr Hypothetical? Because he chose to write off all his income and could have taken better care of his credit . He may be stuck in an adjustable rate mortgage that just adjusted to 9.5% interest only, in an area of the country experiencing declining values.
Now I'm not not suggesting that you don't take advantage of tax deductions where they make sense, just make sure you have enough "paper" income left over to live on, The premium for obtaining a stated income loan is increasing all the time, while the availability of such a loan is decreasing just as sharply. (720 credit score required for a decent rate.)
Words of wisdom to live by or share with your clients.
THE TAX MAN COMETH. PAY HIM!
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