One of the challenges of getting a mortgage is providing tax returns. Tax returns may or may not help you land a loan. Here is what you need to know if you’re looking to land a mortgage with less supporting documentation in the form of tax returns…
If you’re looking to qualify for a loan and you’re a W-2 employee from a company you do not own, and you do not receive any other form of income you generally do not need to provide tax returns to get a mortgage. The lender will make you fill out what’s called a 4506 document which validates that you do indeed file your tax returns with IRS. If you happen to have any tax debt in any capacity whatsoever a payment plan would be required, and that payment would be factored into your debt to income ratio or the debt can be paid off. If you previously did not make enough money and you are not legally required to file a tax return and you’re now a W-2 employee, you still should only be able to provide your W-2 and your most recent pay stubs and still not need tax returns to qualify.
If you receive income that is considered nontaxable or your taxable income is below the annual threshold, no tax returns would be required. Proof of income for example social security or a pension income would need to be supported with an awards letter. This would be so long as there is not a rental income being considered for the loan.
If you are self-employed this is where things become interesting. Generally, lenders want two years of tax returns for self-employed borrowers. Recently, Freddie Mac revised their guidelines which now reads if you’ve been in business for the last five years, one year of federal income tax returns is required.
That is a diamond in the rough and the reason why that’s a diamond in the rough is because, if your most recent tax return shows strong positive income, but your previous years of income are very low you can still qualify. The lender would only ask for one year of income tax returns as well as a profit and loss statement only to support that your current income is consistent with your most recent year of tax return income. To be clear, a profit and loss statement is not used to calculate income.
If you’ve been self-employed for less than five years you will need to provide two years of income tax returns to qualify. That means if your most recent tax returns were good and your previous year was bad it will be averaged with the bad year bringing your overall income to qualify lower.
Following are additional ways to boost your borrowing power…
Changing loan programs
Changing the credit score
Paying off debt
Borrowing less money
Put more money down
Purchase a lower interest rate by paying discount points,
lowering the hazard insurance premium
Adding a cosigner
Changing jobs (possibly)
All the above ways are ways to improve your borrowing power to borrow more money to help you accomplish your financial goals.
Looking to get a mortgage? Get a no cost quote now.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.