By Mike Miles
It’s hard to believe we are already at this point of the year. Tax season is just about finished, and for many of us that file taxes, this is a time of relief. Whether or not you owe money or get money refunded … it’s nice to simply be done with it. Tax time has many cross-over impacts in the mortgage world, so I thought I would touch on them. These are good to keep in mind to help prepare you for when you take on a mortgage.
Use a refund to help buy or sell a house
For any tax payer that is fortunate to get a tax refund, it’s a great opportunity to leverage those funds to help secure a real estate purchase. It is an allowable source of funds to be used to help pay all or part of a down payment, closing costs and/or home inspection costs. Some sellers may be discouraged from selling a house because the perceived expense of getting the house ready to sell (e.g. home repairs and/or pre-inspections). A tax refund can help a seller just as much as a buyer.
Use a refund to help your credit
Many borrowers have some level of revolving consumer debt (credit cards). Those credit cards can either be helping or hurting your credit scores. Your available credit (the difference between the credit limit and the balance) is an important ratings factor with your credit score. Having too little will hurt the score while having a lot will help the score. A tax refund can be used to pay down any balances that exceed 30 percent of a credit card’s limit. If there are a few accounts with balances above this threshold, pay as many as you can down to that point instead of focusing on paying off a single account.
Understand tax return timing for loan qualifying
Borrowers that require tax returns for mortgage underwriting may have a delay in closing. This primarily affects self-employed borrowers or borrowers who earn a significant portion of their income with bonus or commissions. If the 2017 tax returns are needed for underwriting, IRS tax transcripts will be an associated requirement. An IRS tax transcript is a record of your past tax returns and these can take up to eight weeks to be available following your tax filing. So, if you are just now filling your returns, or if you very recently filed returns, you may be subjected to a delay in closing (depending on your closing date).
Excessive itemized deductions could hurt qualifying
Tax payers that leverage itemized deductions to maximize their tax benefit could unknowingly be hurting their borrowing power. Itemized deductions are located on schedule A of your federal income tax returns. One of these categories of deductions relates to unreimbursed business expenses. This category is important because any dollar amount identified in this section will be subtracted from your qualifying income.
Every borrower and every tax payer has a unique situation. Knowing how tax season can impact you if you are thinking of buying or refinancing a home is important. Feel free to call our team with any general questions.