All those tax returns that you’ve been filing over the years could one day prove to be very important documents if you ever decide to buy a home in the future. While they might just be gathering dust in your filing cabinets, at some point you might need to submit your tax returns to your lender in order to provide proof of your taxable income.
Some lenders might not request such documentation, but you want to ensure that you’re prepared to hand over this paperwork just in case, and not just the first page or two. Today, lenders often require entire tax returns and all schedules that come with it. That gives the lender the opportunity to assess your entire income position.
Essentially, your lender is interested in looking at your full tax returns for the last two or three years in order to see if your income is sufficient to sustain a mortgage, as well as to identify if there is any sign of loan fraud.
W-2 Wage Earners
If you are employed and receive a W-2 form from your employer, the IRS will get a copy of this every year which details how much you earned in that year and how much taxes were held back from your paycheck. Your lender will want to know if your income can be verified and if it’s consistent and sustainable.
There’s a chance that your lender may not ask for your tax returns if you’re a W-2 employee, but it’s important to be prepared just in case. However, if you are collecting pension income or social security income, you will likely have to come up with the last two years of tax returns to submit to your lender.
If you deduct any unreimbursed business expenses on your tax return – such as union dues, mileage for work travel, or mobile phones needed for business purposes – your lender will probably subtract this amount from the income you can use to qualify for a home loan. These expenses will then be deducted from your annual salary, which is the actual income that your lender will use towards your home loan qualification.
If you’re self-employed, you will absolutely need to hand in your tax returns. These documents are really the only way for your lender to verify your income over the last few years to assess how much you make after all costs to operate your business have been paid, and whether that income is enough to show that you are financially capable of making good on your monthly mortgage payments.
Your tax returns will show what your actual net income is after you’ve paid your taxes. If you inflate your business expenses or under-report your income, you could be sabotaging your ability to get approved for a mortgage. You won’t be able to modify your previous tax returns to help you qualify, either.
Dividends or Interest From Investments
If you own any investments, such as mutual funds or stocks that pay your dividends or earn you interest, your lender will want to now how much you earn from them and if this income is regular and steady. A one-time income collection is not likely to be counted towards a mortgage approval.
If you’re in some type of sales position, you will likely collect commissions based on your performance. Any commissions that you earn will be analyzed by your lender to see if this additional income is steady. If you didn’t report your commissions to the IRS, this money will probably not be counted towards your income, and therefore won’t be used to assess your ability to pay your mortgage.
If you or your spouse run a business, any losses will need to be recorded when you file your taxes at the end of the year.
If you own an income property that you regularly collect rent from, this amount will need to be specified on your tax return. However, if you bought the property in the current calendar year, the rent you collect needs to be documented on back-to-back monthly bank statements. If you don’t enter any rent collected on your tax returns, you can’t claim that as income when trying to qualify for a mortgage.
When you sell an income property, you’ll be subject to paying taxes on your capital gains, which is the profit you make from the sale of the property. However, it’s not uncommon for capital gains to be counted towards your income because it’s not exactly a viable and continuous type of income, which is essentially what your lender will want to see before a loan is extended to you.
The Bottom Line
Any document that your lender can get a hold of that provides a complete picture of your actual income will likely be asked for. Be prepared to hand in your tax returns from the last two or three years, especially of you are self-employed or are collecting some form of income aside from your regular paychecks.