First Time Home Buyer’s Guide: Tax Returns

Introduction to Tax Returns

For this blog update, we will be discussing the first time home buyer’s need to provide Tax Returns for the home loan. There are many different reasons why a first time home buyer will need to provide tax returns. These reasons can range from sourcing large deposits on a bank statement to comparing income from self-employment income.

 

Tax Returns will help an underwriter validate a first time home buyer’s income.

Reasons Why A Tax Return May Be Requested

One of the primary reasons why a Tax Return may be requested for a first time home buyer is to source a large deposit. In this case, the underwriter will need a large deposit letter of explanation verifying that the deposit was in fact from the tax return. If there are any differences in the tax return, this would need to be further clarified. For example, if a first time home buyer uses a tax preparation service that charges for preparing his or her taxes, then the tax return amount may differ from the amount being deposited. In this case, the submission of the tax return, as well as the invoice for the tax preparation service that shows what the first time home buyer should be receiving. It is safe to assume that the underwriter will never make assumptions about sourcing large deposits into a bank account. The more documentation and better explanation a first time home buyer provides, the less of a chance that the underwriter will question it and ultimately add it as a condition for a conditional approval. 

 

Another reason why a first time home buyer would need to provide tax returns for the loan process would be that the borrower has their own business, or is obtains a 1099. In these cases, the underwriter will need to verify the first time home buyer’s income and also make sure that the first time home buyer doesn’t owe taxes. If the first time home buyer owes taxes, the underwriter will also require proof that there is a payment plan in place, or that the taxes have been paid by the first time home buyer. When a first time home buyer also has Schedule C income, the underwriter will need to verify that this income matches the income that the borrower made that year. To do this, the first time home buyer will either need his or her 1099 forms, and/or profit and loss statements. The underwriter will compare these forms to see that they match. This is also something an underwriter will do if the borrower as W-2 Forms as well. This is usually how they’ll be able to tell if there is income missing, especially for the loan programs that require income to be under certain limits.

If an underwriter requires a tax return, the first time home buyer must send in all pages of the tax return, including all schedules.

What If The Underwriter Needs The Tax Returns?

If the underwriter has asked the first time home buyer for the last two years of tax returns, this is not a cause for concern. The first time home buyer will only need to provide all pages of the tax return, as well as any additional schedules that were also filed along with the return. On the second page of the actual tax return labeled “1040,” all filers on the tax return, including the spouse if it was filed jointly, will need to sign and date in pen in the “Sign Here” section located near the bottom. This is to confirm to the underwriter that this information has been verified and is accurate to the best of the borrower’s knowledge.

For the next blog update, we will be talking more about the purchase contract, which is the legal contract that is the essentially the foundation of any mortgage loan!

 

 

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First Time Home Buyer’s Guide: Profit and Loss Statements and Balance Sheets

An Introduction to Profit and Loss Statements and Balance Sheets

For this blog update, we’ll be going into detail about Profit and Loss Statements, Balance Sheets, the differences between them, and when the first time home buyer will  be needing them for the home buying process. Profit and Loss Statements as well as Balance Sheets are only a part of the mortgage lending process if the borrower has a business that they own.

Balance Sheets and Profit and Loss Statements are only needed if the Borrower owns their own business

Profit And Loss Statements: Explained

Profit and Loss Statements are financial statements that may also be called an income statement. Profit and Loss statements shows the revenue, the cost, and the expenditures during a specific period of time. A profit and loss statement is usually an annual statement, but it can also be semi-annual, or even quarterly statements. For a first time home buyer who is interested in a home loan, most lenders will require the most recent annual statement.  The underwriter looks at the profit and loss statement for a first time home buyer to see the “economical feasibility” of a company. This includes information about a company’s ability to generate income, as well as giving the underwriter an idea of the expenditures of a company. If a profit and loss statement for 2017 is asked for, for example, that information needs to match the information on a Tax Return for that same year. The first time home buyer, if they do not receive W-2 forms from an employer, will need to have the profit and loss statement be checked to make sure that it matches the tax returns. This way, the underwriter can see if any taxes are owed, check if they have the tax payment plan or confirmation, or ask the first time borrower for that tax documentation.

Balance Sheets are Summaries of the Assets and Liabilities of a business.

Balance Sheets: How Are They Different?

Balance Sheets are very similar to Profit and Loss statements. Balance Sheets report a company’s assets and resources. For bigger companies that have shareholders that invest in the equity of the company, this information would also be on this balance sheet. The Balance sheet is a current year-to-date summary or snapshot of a company’s current financial capabilities. This information is current, so there’s nothing to really compare this information to, besides the bank statements showing the flow of money. If the first time home buyer has a specific bank statement for his or her business, this statement would need to be sent in. Any deposits that are from this account going into the first time home buyer’s regular bank account will only need to be explained.

The Balance Sheet and current Profit and Loss Statements can both be asked for by the underwriter. As a reminder, the Profit and Loss Statement can also be year-to-date, as long as it shows all of the expenditures, income, and costs of a business in that current year. If a borrower has a very basic company that they own, without any investors and equity from shareholders, they can usually just submit the Profit and Loss Statement, along with the most recent two years of Tax Returns to show self-employment income to the underwriter.

 

For the next blog update, we will be talking about Tax Returns, and why a first time home buyer will need to submit them for the home loan program. 

 

 

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