When you apply for a VA home loan, your income is reviewed in more ways than one. Not only does an underwriter review your most recent pay stubs and employment history, they also look at your most recent two years or more of tax returns.
That's why it's really important to know how your tax return can affect your home loan approval. For the majority of homebuyers, tax returns won't cause issue, but for those select few, it's really important to know how your income calculations may be adjusted based on certain scenarios.
What scenarios would those be?
Do you own your own business? Are you considered an independent contractor?
If you replied "yes" to either of these, it'll be really important to sit down and take a look at your tax returns with your VA mortgage specialist. The only income that an underwriter will consider is the income claimed on your tax returns. The underwriter will be looking for several things on your return to calculate your income, mainly the following:
If your income is made up in whole or in part of commission or bonuses, you need to ensure that your VA mortgage specialist is aware of how your pay breaks down on your tax returns. An underwriter will scrutinize your tax returns to determine how much of this income they will allow.
If you show an increase year over year in this income, then they'll likely average out the past two years, assuming it can be documented that this income is likely to continue. If on the other hand, the commission or bonus goes down, it's likely that an underwriter will use the lesser of the two years income. Worse yet, they could view that income as unreliable and not permit its use on your loan application at all.
In situations like this one, it's really important for you to gather documentation or evidence that this income is likely to continue and determine what rate it will continue at. A good way of doing that is getting a letter from your employer.
If you own one or more rental properties, it's possible you may be able to use the income from these properties on your loan application, or at least offset the mortgage payment amount on the property. When you have rental properties on your tax returns, an underwriter will calculate the income for the property based on the rent claimed minus losses.
If you show an overall loss instead of a profit, the amount of the loss will be added to your application as a debt and could result in a higher DTI ratio. There are some exceptions here, so make sure you discuss your specific situation with your VA mortgage specialist at the time of application.
If you'd like to get an overview of the VA loan process, check out this guide that will walk you though each step.
As always, email me if you have any questions.
A VA Loan is a mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs. Here we look at how VA loans work and what most borrowers don’t know about the program.
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