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Why Tax Returns Matter in Mortgage

Why Tax Returns Matter in Mortgage

Have you ever applied for a mortgage and wondered why your lender asked for your tax returns for the previous two years?

Debt-To-Income Ratio

One of the main qualifying factors used to approve a mortgage is your debt-to-income ratio (DTI). This number is calculated by dividing all of your debt by your income.

Your DTI helps the lender determine if you can afford the new loan, per their guidelines. And it gives the lender an idea of how much money you have left over after your minimum bills have been paid.

Lenders first determine your monthly debt by pulling your credit report and adding the payments on all open debt. Then, they determine your income. If you are a salaried or hourly employee, your income is calculated using the last 30 days of pay stubs and your last two W-2 statements.

So Why Tax Returns?

Lenders also ask for your tax returns (1040) because unlike paystubs and W-2s, tax returns help to explain the entire story about your income.

The lender needs to know if you are writing anything off. Tax write-offs may pose a problem with your mortgage application. The general rule is that if you are not paying taxes on it, the lender is not going to allow you to use it as income.

Losses, Unreimbursed Expenses, and Depreciation

The most common tax write-offs are unreimbursed business expenses, Schedule C losses, and Schedule E losses.

Unreimbursed business expenses are shown on Line 21 of the Schedule A, and can include mileage, uniforms, dry cleaning, cell phone bills, industry publications/journals, job trainings, etc.

If you have a self-employment business you might file a Schedule C or a Schedule E depending on how you structure the business. A Schedule E may also be filed if you own rental property or receive royalties. Both Schedule C and Schedule E may show losses.

Anything listed on line 21 of the Schedule A and any losses from Schedules C or E may be netted out of your income.

On your Schedule C, however, any depreciation that you claim may be added back into your income. The same applies if you file S-Corp returns for your Schedule E self-employment business. Any depreciation filed on those returns may also be added back in to your income.

More to the Story

The story of your tax returns does not end there, however. Your tax returns will also tell the lender if your home has any farm income, if you pay alimony, or if you have received unemployment income.

If you file a Schedule F (farm income) on the property you are refinancing, it may make you ineligible for certain mortgage programs.

If your tax returns list alimony paid to an ex-spouse, that alimony payment may need to be listed as a liability when calculating your debt to income ratio. This can affect your approval.

Your returns will also show if you have received any unemployment compensation, which might require a letter of explanation about your employment history. This can also affect your approval.

Your tax returns play an integral role in the qualification process of your mortgage. If you have any questions or concerns about whether or not you will qualify, a Meridian Home Mortgage Loan Officer is available to answer your questions. Please do not hesitate to contact us.

5 Ways to Simplify the Mortgage Application Process

5 Ways to Simplify the Mortgage Application Process

If you are in the process of a mortgage application and are looking to close as soon as you can, there are steps you can take to help ensure there are no delays.

Here are five tips that can help you:

1. Continue to pay all of your bills on time

Your credit history is one of the most vital elements of your mortgage application. Sometimes it’s necessary for lenders to re-pull credit before the loan process is complete.

For example, if you are applying for a conventional loan your credit will likely be pulled again before your loan funds so that the lender can verify that you have kept your credit clean throughout the course of your application.

A drop in your credit score could increase your rate, or even make you ineligible for a loan.

2. Try to avoid opening any new liabilities after you begin your application

New credit cards, auto loans or other lines of credit will need to be disclosed to your lender just like old accounts. Any new liabilities will need to be verified and added into your debt-to-income (DTI) ratio, which could affect your qualification.

3. Call the appraiser back and make an appointment ASAP

The appraisal process can take up to a week or more to complete. An appraiser has to make an appointment to see your home, perform research on your home from the appraiser’s office, and then prepare the appraisal report.

Try to call your appraiser back and make an appointment for the appraisal as soon as you can to help collapse this time frame.

4. Submit whatever the lender asks for in a timely fashion

If the underwriter asks for documentation, it is pretty certain your loan will not close until they sign off on it. The faster you are able to submit that documentation, the quicker the mortgage process will be.

5. If you switch jobs, inform your lender ASAP

Your lender will verify your employment before funds are issued on your loan. If you switch jobs, the underwriter will need to see at least one pay stub and verify that your new employment will continue.

Be sure to tell your mortgage representative before accepting a new offer so they can let you know how it might affect the process.

As your mortgage broker, Meridian Home Mortgage is committed to keeping the mortgage process smooth and simple. We encourage you to follow these tips to help ensure that your loan closes on time. We are here to help you every step of the way.

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FICO Changes = Higher Credit Scores for Consumers

FICO Changes = Higher Credit Scores for Consumers

Fair Isaac Corp. will soon change their FICO scoring algorithm used in determining a person’s credit scores. It should result in higher credit scores for many consumers. FICO calls their new scoring method FICO Score 9. This method will no longer grade medical collections as harshly and it will not factor in any paid or settled consumer collection accounts in credit scores at all.

What is FICO?

FICO is the credit scoring algorithm created by Fair Issac Corp. It only uses information reported to the three major credit bureaus to grade a consumers credit worthiness. According to myfico.com, a FICO Score estimates the “level of future credit risk” of a consumer.

Consumers have three FICO Credit Scores – one for each of the three main credit bureaus (Equifax, Experian, and TransUnion). Each bureau uses the information reported to them when determining their FICO score. So while each bureau uses the same FICO scoring algorithm, the scores can differ because not every creditor or lender reports to all three bureaus.

FICO Score 9, once released, should result in higher scores for many consumers thanks to two major changes in how they will grade collection accounts.

Medical Collections

Open medical collections will no longer negatively affect your credit score as much as they do now. They will no longer be counted the same as other open consumer collection accounts.

Most major lenders have long overlooked medical collections, knowing that they do not give a true indication of a consumer’s ability to re-pay debt. An applicant who is ill-prepared to pay for a sudden major medical debt, for example, should not be graded as harshly as one that walked away from consumer debt that they had promised to pay.

Still, these collections can have a major negative impact on credit scores. And lenders are still very credit score driven. Lower scores due to medical collections can lead to higher rates, higher fees, and even loan denials.

The upcoming changes in FICO scoring will finally acknowledge what lenders have known for years; that medical collections do not represent a borrowers true ability to re-pay debt. Thankfully, credit scores will no longer suffer once these changes take effect. In fact, FICO claims that consumers can see as much as a 25 point increase in their score!

Paid/Settled Consumer Collections

As of right now, if you have older collection accounts that have been paid in full or satisfied, they can still negatively affect your credit scores for years, even though they report as being satisfied or paid.

But after FICO Score 9 takes effect, these paid/satisfied collection accounts will be dropped from your credit report altogether. They will no longer have a negative impact on your FICO scores. In other words, the new FICO scoring method will continue to count open or unpaid collections against a consumer’s score, but it will reward them by removing the collection account once it is paid or settled.

Who Benefits?

These two major changes in the FICO scoring method should open doors for a lot of consumers who will realize higher credit scores as a result. It can equate to lower rates, lower fees, and even loan approvals instead of denials. It also benefits lenders by providing a more accurate assessment of a consumer’s ability to re-pay debt.

There is no exact date for the FICO 9 Score release, but rumor has it that it will happen sometime in the Fall, 2014.

Please do not hesitate to call one of our Personal Advisers for more information. We look forward to hearing from you soon.

New Online Credit Management Tool: ReadyForZero

New Online Credit Management Tool: ReadyForZero

Credit card debt is still a big issue for many people. According to a detailed post on NerdWallet, the average amount of credit card debt carried by U.S. households is $15,185.

Many people want to get out of debt but can get overwhelmed trying to figure it out – especially with all the conflicting information available. Questions around debt reduction include questions such as:

  • Pay the card with the largest balance or the highest interest rate first?
  • Save money while paying down debt or take money out of savings and make a lump payment?
  • Consolidate debt or just pay off the cards one by one?
  • And, which is better? Biting the bullet and paying it all of as quickly as possible (and going into what some call deprivation mode) or setting aside a specific amount each month and paying it down slowly over time while enjoying your life?

That’s why we like this new tool: ReadyForZero.

Developed by people who actually had debt, ReadyForZero helps you manage debt, track your credit and change your attitudes about money.

Manage Debt

With the basic plan (free!), you can set up a personal profile that allows you to track your progress in paying off debt. Within your profile, you link your credit card accounts. The tool then tells you which credit card to pay first and charts show your progress.

You can also upgrade your account to the Plus plan ($75 per year) which gives you two cool features: automatic payments and your credit score. You can have the system make payments for you automatically on a bi-weekly basis (26 payments a year versus 12) based on when you get paid and have cash.

Making bi-weekly payments has a number of positive benefits.

  • One, as with weight loss, you see your debt being reduced much faster – which motivates you to try harder.
  • Two, by paying biweekly, you eliminate late charges which can lead to higher interest rates and a lower credit score.
  • Three, splitting your payment makes it less painful.
  • And four, by paying more over time, you lower the amount of interest paid.

Track Credit

The system also works with Experian, one of the credit reporting agencies. When you upgrade to the Plus Yearly plan, the system automatically tracks your credit score.

If you’re saving for a house or a new vehicle, knowing this information can help motivate you to clean up any credit issues and pay down debt – even a few points increase in your credit score can help you get a better interest rate.

Change your Attitude about Money

For many people, money is an emotional topic – one that we don’t like talking about – and this is especially true with regard to debt. Once people get into debt, they have a hard time getting out due to feeling shame and embarrassment.

In addition to offering tools for managing your debt, ReadyForZero’s staff (some of whom were in debt themselves) address the emotional issues surrounding debt. Instead of beating you up and telling you how awful you are (as some of the big name financial gurus do), they help you change your attitudes toward money and debt. By addressing these issues in a more positive way, you free yourself to reach your goal: paying off your debt.

What It Doesn’t Do

ReadyForZero doesn’t help you consolidate debt, work with creditors to reduce payments or interest rates, or remove faulty information from credit reports.

In addition, you may not be able to link all of your credit or student loan accounts. When we did a test run of the application, we were not able to link a credit card from a lesser-known bank. When we emailed ReadyForZero support, we received an email back the same day (from a real person!) stating that the company is aware of this issue and is working to resolve it.

We work with people every day in terms of helping them resolve credit issues so that they can refinance their home or purchase a new one. If you’ve got tough credit problems and/or an underwater mortgage – give us a call and let’s talk. We’re here to help you.

Using Your 401k to Finance a Mortgage Down Payment

Using Your 401k to Finance a Mortgage Down Payment

401k to Finance Your Mortgage Down Payment

Are you having trouble figuring out how you will finance the down payment for your home? Have you been looking for down payment assistance? Some people are reaching into their 401k retirement accounts as means for down payment assistance. It is important to understand the different options and what they entail. Rules and regulations may vary depending on your company’s plan.

Hardship Withdrawals

Typically 401ks are only available for withdrawal if you quit your job, retire, or become disabled; however, some companies allow “hardship withdrawals” for those with immediate financial need. This usually includes use for the down payment or purchase of your primary residence.

This option does have its drawbacks. First, you will be charged taxes and penalties on the amount withdrawn, which are often required to be repaid within a year of the transaction. First time home buyers are exempt from a 10% penalty, as are those over 59 1/2 years old. Second, the money withdrawn will no longer be earning interest which will affect the long-term growth of your account. When retirement rolls around, you could be sorry. Lastly, you will be repaying a portion of the loan with after-tax dollars, meaning the additional interest going into the account will be taxed twice (once at the time of contribution and again when funds are withdrawn at retirement).

Loan

Another option is to borrow against your 401k to use towards your down payment. Many companies allow employees to borrow as much as 50% of the current balance, but a minimum loan of $10,000 is generally required. The funds you receive are not taxable and the prime rate plus 1% interest you pay on the loan will go back into your account. And because you are essentially borrowing money from yourself, no credit check is required.

There are risks involved with borrowing against your 401k as a source of down payment assistance. If you leave your job or lose your job, the loan must be repaid in full within a specified time period (usually 60-90 days). If the loan is not repaid within that time frame it is considered a withdrawal and taxes and penalty fees will be applied . Additionally, 401k loans usually have short term paybacks with high monthly payments.

Before dipping into your 401k savings for a down payment on your home, consider all of the advantages and disadvantages. In certain situations, using funds from your 401k for down payment assistance may be the most ideal option. But if you’re not careful, the decision to borrow may have negative consequences.

Have You Exhausted All Other Sources of Cash?

There are alternatives to fund your down payment. You may qualify for federal, state, or local down payment assistance. See which down payment assistance programs are offered in your area. In addition, you may want to research loans that offer no money down. An FHA mortgage loan allows you to borrow up to 97% of the home value with the remaining 3% paid for by gifts. VA loans and USDA loans offer no money down for those who qualify.

FAQs

Restore Damaged Credit

Restore Damaged Credit

Many prospective borrowers are unable to qualify for low rates or obtain loan approvals because of damaged credit, late payments, bankruptcies or foreclosures.

Often times credit reports can contain old medical collections or errors that may impact consumers’ credit scores. This derogatory credit can be frustrating for many homeowners who would otherwise qualify for a new home loan.

We Have Great News

Sometimes all it takes is a small credit score increase to get qualified. Don’t let a few blemishes prevent you from lowering your rate or consolidating your debt. You could be just a month or two away from being able to qualify for a mortgage that can save you thousands of dollars.

It’s never too late to begin the restoration process. The fastest and easiest way to resolve an inaccuracy on your credit report is through the online Credit Report Dispute process located on each of the three major credit bureau websites – Equifax, Experian and TransUnion.

Once your dispute is completed, please contact us for a new credit report. Thank you and good luck!