Tips Before You File Taxes

Thinking of refinancing or buying a new home this year? Or, possibly a rental property?

It is strongly suggested you review your draft returns with a lender before you file for 2017, to be certain you will qualify for the loan you anticipate. Underwriting guidelines for loans oftentimes calculate income in a different manner than you might think. We don't go by adjusted gross income on the front page of the 1040. There can be many additions and reductions to income, depending on what 1040, 1120, and 1065 returns reflect.

Here are some noteworthy items to consider that are common issues in the loan underwriting process:

1. 2106 expenses (non-reimbursed business expenses noted on p.3 of the 1040) are not typically taken as a reduction of income anymore UNLESS the borrower income is more than 33% commissioned/bonused. A salaried W-2 employee can claim all the 2106 expenses they want and it won’t affect income. But for someone who is 100% commissioned, 2106 expenses would reduce income dollar for dollar.

2. Schedule C losses for 2nd jobs (“hobby” jobs) are ignored, so long as the borrower has full-time employment. Losses for MaryKay, Rodan & Fields, or other "hobbies" whether for borrower or co-borrower, will not reduce income if showing a loss, if borrower has a full-time job. Reasoning is, if they are actually losing money, they can stop anytime.

3. Items on Line 16 of Schedule L (balance sheet) on 1065 and 1120 returns are always deducted from income. I find typically the items shown here do not belong, as they will either renew automatically, be extended, or are already paid. We can disregard them with a CPA letter or other evidence that they are not actually due in full in the next year. Anything on line 17 is ignored. Best to place those short term liabilies on line 17 if at all possible.

Remember refinancing a rental property is typically limited to 75% of value. A cash-out refinance of a rental will be limited further.

I am seeing a lot of FHA borrowers wanted to refinance out of their MI due to higher property values. Even with a higher rate on the new mortgage, oftentimes their monthly payment will be lower without the pesky MI payment. Their future hold time should be taken into account, naturally.

Let me know if you have questions on anything!