If you’re looking to buy a home, the higher your reported income, the bigger the home loan you’ll qualify for. So, if you’re planning on buying a home in the next year or two, you may want to be less aggressive about claiming write-offs.
No matter what your situation, here’s what you need to know :
If you’re self-employed
Pay attention to large deductions, such as those for a home office or business vehicle that can significantly reduce your reported income. For big, one-time deductions, be sure to save your documentation and explain to your lender the circumstance that removed your income in that year. You can also assuage their concerns by having a larger cash cushion or by putting down a bigger down payment. If you’ve just recently gone freelance, you may also run into issues getting approved for a mortgage if you don’t have a track record to demonstrate your earning potential. It doesn’t matter how much experience you have in a field, once you strike it out on your own, they need to see two years of self-employed income.
If you’re on staff
Workers with W-2s typically have an easier time getting approved than those who are self employed, but any write-offs on your Form 2106 for unreimbursed business expenses will be deducted from your salary. If you got a new job that doesn’t appear on your tax returns, ask your employer to provide a verification of employer letter, which can reassure the lender that you’re good for the income stated on your application. Workers whose tax returns show that they were unemployed for a significant period of time in the past two years may also run into trouble, since lenders want to see a consistent two-year work history. Be ready to explain any long-term gaps.
If you’re claiming rental income
Just as your business expenses will be deducted from your salary, any write-offs you take on a rental property will be deducted from your rental income. Lenders will look at your Schedule E to verify the amount of rent you collect and determine how much you spend on the property. Deductions from depreciation don’t count against you.
Forgoing some of these tax deductions might make you cringe a little bit, but just think of the tax breaks you can get once you’re a homeowner !
