Most know it’s much easier to qualify for mortgage loan financing if you are a W-2 wage earner, an employee rather than being self-employed. However, what many don’t realize is there is an ominous tax deduction that will substantially limit your ability to qualify for a mortgage loan. If your employer does not reimburse you for business expenses you incur, here’s why you want to think twice about writing them off…
IRS Form 2106
The tax code explanation is clear, unreimbursed business expenses are Form 2106 are considered costs you have to pay in order to earn a buck. It’s not a right to claim these expenses but rather, an option for expenses incurred your employer won’t reimburse you for.
Where Mortgage Applicants Get In Trouble
Taking these expenses limits borrowing power as your usable income is cut. If you earn $100,000 per year, that’s $8,333 per month before pretax. Let’s say last year you wrote off $7000 in unreimbursed business expenses you incurred via the course of your employment. Your income will be reduced by every dollar that you don’t pay taxes on-making qualifying tighter.
Remember that $8333 per month in income?
Now it’s $583 per month less in come….
Here’s why: your lender will consider your income to the extent of the amount you were actually taxed on. In other words. You’re not paying taxes on that $7000 so that number comes off your total earnings reducing your income to $7750. If you’re trying to buy a home, and your loan officer qualifies you off the $8333 per month figure, you’re going to have a tough time in the credit decision process when the loan is underwritten.
*Tip: make sure to tell your mortgage company you took these expenses!
Mortgage Lending Rules On 2106 Business Expenses
Lenders take the last two years of tax returns into consideration when determining your eligibility for qualifying for a mortgage loan. If you took 2106 business expenses for the last 24 months, they will be averaged over a two-year period of time. Simply adding two years of 2106 expenses then dividing by 24, representing 24 months.
If business expenses were taken only in one of the most recent last two year, the liability will be averaged over 12 months. In some circumstances, if a borrower can prove the 2106 were a one-time expense, and can provide receipts of what those expenses were, along with a letter of explanation and/or an additional employer letter explaining the nature of expense reimbursement, there is a possibility lender can omit the numbers, giving them their full income supported by their tax returns and W-2s.
*Tip: If you are entitled to take 2106 business expenses and you choose to not take them for a deduction, you will pay more in taxes by the difference of how much you would save by having written them off. Make sure to talk to a qualified tax professional.
For the purposes of trying to qualify for mortgage, the absolute best thing the consumer can do for themselves if getting a mortgage loan is on the radar, is to not take these business expenses as writing them off greatly affects your chances of attaining a home loan.