Income Is Most Important Factor In Qualifying For Mortgage

Unreimbursed Expenses In Mortgage Qualification

Gustan Cho Associates

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.  You can have low credit scores and prior bad credit but if you have documented income, you can qualify for a mortgage loan.  If you have perfect credit but no income, you cannot qualify for a mortgage loan.  Income is the most important factor for anyone who needs a mortgage loan.  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 because most self-employed or 1099 wage earners deduct business expenses on their tax returns and those deductions, often referred to unreimbursed business expenses can hurt your mortgage approval because it reduces your monthly gross income when a mortgage loan underwriter calculates your 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 and 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 that you have incurred during the year to run your business or to effectively earn your income from your job.  The Internal Revenue Service allows you to write off expenses that you have incurred on IRS Form 2106, Unreimbursed business expenses, and you can offset these costs and expenses from your gross income where it saves you money in your income taxes.  You can claim unreimbursed business expenses for expenses that you use on your job or to do your job where your employer does not reimburse you for your expenses if you are a W-2 income wage earner.  For self employed wage earners, any expenses that you incur to do your job can be written off on IRS Form 2106.  For example, if you are a carpenter, all of your tools, equipment, can be expensed off on your IRS Form 2106 and you will pay income taxes on your income less your unreimbursed business expenses.  This is a great tool to minimize in you paying income taxes but normally back fires when you apply for a mortgage loan because it will hurt your debt to income ratios.

Unreimbursed Business Expenses Affects Mortgage Qualification

Utilizing unreimbursed business expenses can be a deal breaker for a mortgage loan applicant because these business expenses will cap the borrowing power from the home buyer because the qualifying income is reduced.  For example, if you make $120,000, that translates into $10,000 per month before pre-tax.  If you were to write off $24,000 in unreimbursed business expenses that you have incurred from your employment, your income will be cut by every dollar that you did not pay income taxes on which makes qualifying for a mortgage loan higher.  Your adjusted gross monthly income that you are 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 a mortgage loan applicant 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 applicant that do, the unreimbursed business expenses can pose a serious problem during the underwriting process.  It’s best to analyze the mortgage loan applicants overall net adjusted gross income and look at the borrower’s income tax returns very carefully at the initial state of the mortgage application process.

How Do Underwriters Analyze IRS Form 2106: Unreimbursed Business Expenses

Mortgage loan underwriters will ask for two years income tax returns from every mortgage loan applicant to determine the borrowers unreimbursed business expenses.  The way mortgage loan underwriters calculate unreimbursed business expenses is by looking that the IRS Form 2106, unreimbursed business expenses, for the past 24 months and they will average the 24 months to yield a net monthly amount which is then subtracted by the mortgage loan 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 loan underwriter can exempt the unreimbursed business expenses if it was a one time occurrence for just that particular year if the mortgage loan borrower can write a detailed letter of explanation detailing the reason of the expenses that was written off.  For example, if a mortgage loan borrower wrote off a substantial amount of unreimbursed business expenses on their IRS Form 2106 two years ago and 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, and that was not part of the scope of work for the mortgage loan borrower and the employer can state that in writing, then this borrower can probably get his unreimbursed business expenses exempted.

Special Mortgage Program: No Tax Returns Required

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 your 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.  Contact me for more details at

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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