Unreimbursed Business Expenses And How It Affects Mortgage Process


Unreimbursed Business Expenses And How It Affects Mortgage Process

This BLOG On Unreimbursed Business Expenses And How It Affects Mortgage Process Was UPDATED On May 10th, 2019

Days of no doc and state income mortgage loans are long gone and there is no sight in the near future that it will ever come back. Gustan Cho Associates Mortgage Groups has government and conventional W2 Income Only Mortgages. No Tax Returns are required. We also have bank statement mortgage loans for self-employed borrowers. Again no tax returns are required. We will discuss qualifying for a mortgage with unreimbursed expenses on this blog.

  • Borrowers can have low credit scores and prior bad credit and qualify for a mortgage
  • With documented income, borrowers can qualify for a mortgage loan
  • Home Buyers with perfect credit but no income cannot qualify for a home loan
  • Income is the most important factor for anyone who needs a mortgage
  • Income needs to be documented and cannot be cash income
  • It is much easier to qualify income for a W-2 wage earner than a self-employed or 1099 wage earner
  • This is because most self-employed or 1099 wage earners deduct business expenses on their tax returns
  • Those deductions, often referred to unreimbursed business expenses can hurt qualifying for a mortgage
  • This is because it reduces monthly gross income when mortgage underwriters calculate debt to income ratios
  • Even W-2 employees can get stung if they claim a lot of unreimbursed business expenses on their tax returns
  • Those unreimbursed business expenses are offset from the borrower’s W-2 income
  • It reduces the monthly effective income which means that the home buyer’s debt to income ratios is affected

IRS Form 2106: Unreimbursed Business Expenses

IRS Form 2106 is unreimbursed business expenses.

  • Unreimbursed business expenses are costs consumers have incurred during the year to run a business or to effectively earn income from their job
  • The Internal Revenue Service allows workers to write off expenses they have incurred on IRS Form 2106 Unreimbursed business expenses
  • Tax payers can offset these costs and expenses from gross income
  • This saves money in income taxes
  • Tax Payers can claim unreimbursed business expenses for expenses they use on the job or to do their job
  • This can be claimed where an employer does not reimburse employees for expenses if they are a W-2 income wage earner
  • For self-employed wage earners, any expenses they incur to do the job can be written off on IRS Form 2106
  • For example, here is a case scenario:
    • carpenter
    • all of the tools, equipment, can be expensed off on IRS Form 2106
    • carpenter will pay income taxes on income less unreimbursed business expenses
  • This is a great tool to minimize paying income taxes
  • Normally backfires when applying for a mortgage loan
  • This is because it will hurt debt to income ratios due to not declaring all of the income

Unreimbursed Business Expenses Affects Mortgage Qualification

Utilizing unreimbursed business expenses can be a deal breaker for home buyers qualifying for mortgage. This is because these business expenses will cap the borrowing power from the home buyer. Qualifying income is reduced.

  • For example, case scenario:
    • Make $120,000
    • that translates into $10,000 per month before pre-tax
    • if tax payer were to write off $24,000 in unreimbursed business expenses incurred from employment, income
    • this will be cut by every dollar they did not pay income taxes
    • makes qualifying for a higher loan amount
    • adjusted gross monthly income is now able to use is $8,000
    • which is $10,000 gross income less the $2,000 in unreimbursed business expenses
  • Many mortgage loan originators do not look at the borrower’s tax returns carefully when qualifying and just go off the W-2s
  • Most W-2 employees do not claim a substantial amount on IRS Form 2106
  • But for those mortgage applications that do, the unreimbursed business expenses can pose a serious problem during the qualification process
  • It’s best to analyze borrowers overall net adjusted gross income
  • Look at the borrower’s income tax returns very carefully at the initial state of the application process

How Do Underwriters Analyze IRS Form 2106: Unreimbursed Business Expenses

Mortgage underwriters will ask for two years of income tax returns from borrowers to determine unreimbursed business expenses.

  • The way mortgage underwriters calculate unreimbursed business expenses is by looking that the IRS Form 2106, unreimbursed business expenses, for the past 24 months
  • They will average the 24 months to yield a net monthly amount which is then subtracted by borrower’s gross monthly income

In the event, if the unreimbursed expenses were just taken only in the most recent last two year, the liability is averaged over 12 months and not 24 months.

  • There are cases where a mortgage underwriter can exempt the unreimbursed business expenses
  • This can be done if it was a one-time occurrence for just that particular year
  • If a borrower can write a detailed letter of explanation detailing the reason for the expenses that were written off
  • For example, here is a case scenario:
    • if borrower wrote off a substantial amount of unreimbursed business expenses on their IRS Form 2106 two years ago
    • not the most current year because he was temporarily transferred to another branch of his company due to a one time emergency such as the company acquiring a new branch
    • that was not part of the scope of work of the borrower
    • the employer can state that in writing
    • then this borrower can probably get his unreimbursed business expenses exempted

W2 Income Only Mortgage Loan Program

I can now offer W-2 income wage earners who have substantial unreimbursed business expenses on their tax returns where no income tax returns are required.  To qualify, you need to be a W-2 income wage earner and cannot have more than 25% of W-2 income as commission or bonus.  This special mortgage loan program is available for W-2 wage earners only and can benefit any W-2 wage earner who has substantial write-offs on their IRS Form 2106. FHA, VA, and Conventional Loans have W2 Income Only Mortgage Loan Programs. We also offer 24 bank statement mortgage loans for self-employed borrowers. No income tax returns are required.  Contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for a faster response for more details. Or email us at gcho@loancabin.com.

 Related> Income qualification

Related> Amending tax returns to qualify for mortgage

Related> Factors that affect pre-approval

  1. Gustan Cho, NMLS 873293 says

    Home buyers who have a lot of unreimbursed business expenses on their income tax returns can potentially qualify for W2 INCOME ONLY MORTGAGE LOANS where income tax returns are not required.

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