Income Tax and Your Mortgage Application
Whether you are looking to buy a home or refinance your current mortgage, your income taxes are a required piece of your mortgage application. Your federal income tax return is key to determining your mortgage loan approval.
These are the ways that your income tax return is a factor in your mortgage application.
Calculating Income for Qualifying
In order to approve your mortgage application, lenders need to assess your ability to repay the loan. Taking a look at your income requires an analysis of your stable income in comparison to your monthly debt obligations.
- Reported Income: When an underwriter looks at your tax documents, they get a comprehensive look at your income. Underwriters are looking for proof of a stable income to determine that you have the capability to make the required monthly payments
- DTI Ratio: Short for debt to income ratio, your DTI is a comparison of your monthly income and your existing debt obligations. The percentage of your current monthly income that is dedicated to paying your total monthly debt payments plays the main factor in the loan amount you qualify for.
These federally regulated calculations protect both you as the home owner and the loan servicer (bank), to ensure that the mortgage is affordable. Compare the different types of Purchase Loans and Refinance Loans that are available to you and their qualification requirements at Texaslending.com.
Required Documents
Applying for a mortgage loan requires a full understanding of your finances. Supporting documentation must be reviewed by an underwriter to ensure that your application meets federal mortgage guidelines.
Be prepared to submit copies of these documents associated with your federal income tax:
- W-2 forms for the last 2 years (1099 if applicable
- Copies of full and complete income tax return statements for the last 2 years (to include schedules and attachments)
- Employment history for the last 2 years
- Copy of corporate/partnership tax returns for most recent 2-year period if owning 25% or more of company
- Copy of Photo ID for applicants
- Copies of paycheck stubs for the last 30 days (most current)
- Copies of checking and savings account statements for the last two months (all pages)
Other documents that may be requested:
- Copies of recent statements for IRAs, CDs, money market fund, stock, 401k, profit sharing, or copy of current YTD profit & loss statement for self employed applicants
- Any assets used for down payment, closing costs, and cash reserves must be documented by a paper trail.
- Bankruptcy: copies of signed discharge and supporting schedules
- Divorce: divorce decree
- Retirement: proof of monies received from social security/retirement trust income
- Rental Property: Copies of leases and mortgage information
- Veteran applying for a VA loan: Certificate of Eligibility and copy of Form DD214
*Each financial situation is unique and additional documentation may be required during the loan process.
Our goal in this article is to give you some insight into how income tax is used in your mortgage qualification. We want our customers to be well informed. Follow us on Facebook to see more updates from our blog like this and other information about home ownership.
Reach out to us with your mortgage questions anytime.
