tax deductions used in mortgage applications?

[mafibisha]

Ok, I've never heard this before, but my little sister and hubby are buying their first house so getting their first mortgage. They were told that their tax deductions (that were significant due to DBILs work) are being used to decrease their income on the application.

She hasn't told me the specific numbers but for example, if they made $100K and had $10K of deductions, the loan application will state they only made $90K.

I don't recall anything like this in all of our loan applications. Or is this fairly new? Or did I just miss that line on the app? Anyone know anything about this?

 

[Sadie22]

I'm self-employed. When we have refinanced our mortgage, my gross income was listed on the application. Recently when I applied for an auto loan, I was asked for my net income after expenses (deductions) so maybe this is usual now.

 

[tar heel]

I think that's really strange, especially with the net income. FSA and 401K contributions are the bulk of the nontax withholding from our income. Both are totally optional, so why should they affect what a lender would consider our income.

The deductions thing is even stranger.

 

[MomtoGKC]

My friends are self employed and this happened when they applied for their first mortgage as well. Brought their income way down.

 

[tlbwriter]

So they're basing the loan on their taxable income? Can't say I've heard of that, but I can see why it would make sense.

 

[timmac]

If they're self employed, e.g. all 1099/Schedule-C kind of stuff, then this would make perfect sense. Deductions, in this sense, isn't at all the same thing as the deductions that those who only get W-2 income think of... I'm just taking a guess that might be part of the confusion.

 

[tar heel]

That does make sense. It was the words "deductions" and "net" that threw me.

 

[mom2alix]

PP have explained how this might apply if your BIL is self-employed, but there may be another answer as well.

If BIL is an employee, they may be removing the deductions if his company uses a non-accountable plan. Basically in a non-accountable plan, employees are provided with an expense account regardless of what expenses they incur and they then deduct those expenses on their taxes. That expense account money is reported on the W-2, Box 1 just like gross wage income.

By taking out those business expense deductions, they are basically trying to look at what is truly wage income vs. what is actually expense account.

Other employers may use what is called an accountable plan - this is where you submit your receipts, etc. and the company reimburses you. That money is not reported on your W-2 in Box 1.

 

[mafibisha]

OP here.

Thanks for the replies.

No, these are just regular deductions.

We were all surprised that the loan wasn't based on gross income but instead, their net income.

So this is now (farily) normal? Does it depend on something else (for example credit rating?) or the lender, if its calculated that way?

 

[disneyofcourse]

Hey OP, Using the net income is pretty normal now (from what I've seen) for us self employed people