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Tax No-Show

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Posted On: 01/03/2018

Question: We own a small business and want to buy a home. We met with a loan officer who wants to see our tax returns. Like many businesses we have deductions, which result in a smaller taxable income, but are perfectly legal. Can we get a mortgage without showing our tax returns?

Answer: According to the Bureau of Labor Statistics, 15 million people are self-employed, about 10 percent of the workforce. For this reason you can be certain that lenders are familiar with business tax returns and understand, for example, that a deduction for depreciation is not an actual cash expense.

While individual loan programs may require lenders to review tax returns, it is possible to get mortgage financing without them. To understand why, you have to look into the Ability-to-Repay rule. In basic terms it says that any commercial lender originating a residential mortgage must prove the borrower has the financial capacity to repay the debt.

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What’s interesting about the rule is that it gives lenders a lot of flexibility. Lenders must make “a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan.”

According to the Consumer Financial Protection Bureau, lenders must “verify that consumers can afford to repay their mortgage – that’s the whole point. Lenders will make that determination by looking at documents such as payroll stubs, tax returns, student loan statements, credit history and other financial information … Looking at this kind of documentation is something responsible mortgage lenders have always done, and the new rule makes sure that every lender follows prudent underwriting practices.”

Today it is again possible to get financing without tax returns, but the terms are different. The lender must verify the ability of the borrower to repay the mortgage. If not tax returns then how about other evidence of financial stability such as personal bank statements? As a borrower you’ll likely pay for the privilege of alternative underwriting with a higher interest rate, a requirement for more down, or both. What you will not get is a verification-free loan application where the lender does not poke and prod every financial statement it receives.

If you have the choice – and it’s likely that you do – speak with experienced loan officers. The odds are overwhelming that lenders have worked with other business owners and have the ability to properly assess your tax returns and verify your financial situation. If your loan can be underwritten the usual way you are likely to pay less, and that should be incentive enough to try.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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