1

I'm new to this sort of thing. I want to buy my first house soon (within a year?).

As I am filing my taxes right now, should I

  1. file with my income but not report expenses, so that my taxable income looks higher, or
  2. report my expenses, so that my taxable income is lower?

Is the first option even allowed? Can we choose not to report expenses, and thus pay more taxes on higher income? Does reporting all expenses, and therefore having a lower monthly debt-to-income ratio, increase my chances? Should I report some expenses, and be in the middle somewhere?

What should I do, in regards to filing taxes, to maximize my ability to get a mortgage?

  • 3
    Care to give more details as to what you mean by 'expenses'? With no house, you are not likely to itemize. Do you have high charitable donations (and therefore itemize) or high medical cost? – JoeTaxpayer Apr 10 at 12:43
  • 1
    Don't lenders always ask about gross income? – DJClayworth Apr 10 at 13:37
  • More than that, until my last dealing with a bank (in which i said I was retired) they always asked for 2 years tax returns. No matter what I took on the schedule A, they’d see gross income. And the W2 would show 401(k) taken off the top. – JoeTaxpayer Apr 10 at 16:47
  • @JoeTaxpayer because I rent out my cars, and do airbnb in my room where I live, so I have income from those, aside from regular work. And I have related expenses for the cars and airbnb. – trusktr Apr 10 at 18:58
10

What should I do, in regards to filing taxes, to maximize my ability to get a mortgage?

I would suggest that you not try to maximize your ability to get a mortgage and certainly not try to pay more taxes to overstate your income.

Mortgage lending is already set up to allow one to borrow far more than is usually a good idea to borrow. The lender’s goal is to sell you the largest mortgage you can “afford” and their definition of afford is the largest amount you have a high likelihood of paying back over time.

If you maximize your mortgage there is rarely enough left of your income after paying the mortgage to allow you to set yourself up for a stable financial future.

  • I'm planning to make money from the home, and that it'll pay for itself, because it'll be in a tourist area, so the bigger the better! But turns out the cost of paying the taxes is too steep anyways. – trusktr Apr 12 at 1:07
  • @trusktr That’s a rather different investment property situation where you would want to consider the income from the property to decide if it was a good investment or even if it was just to offset some of your costs. – T. M. Apr 12 at 12:03
  • True, and I'm planning for the income to be profitable on a monthly basis, and to pay back the downpayment within a year. So I'm thinking that higher income may help here, especially if I can take a monthly payment plan for any taxes, and then amend the tax return later, for example (I've heard of people doing that). – trusktr Apr 14 at 18:58
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    People do lots of things. That doesn't mean it's a good idea. – T. M. Apr 14 at 20:22
  • Hiding expenses to misrepresent your income to qualify for a larger loan than you would otherwise qualify for is not possible fraud as others mentioned, it’s flat out fraud. The bank would probably wouldn’t even have a hard time proving it if you then file an amended return to claim the expense you hid. – T. M. Apr 15 at 0:08
5

We can't tell you what to do, just the consequences.

Setting aside the issue of fraud, which is serious in its own right, if you under-report your expenses:

  1. You over-estimate your disposable income. This means that you might be considered for a loan that is above your real disposable income.
  2. You pay more tax, reducing your actual disposable income. This impairs your ability to service a loan you could otherwise afford.

The combination of the two means that if you are successful, you might end up with a loan you can't afford, and have less money with which to service that loan.

Of the two, #2 is a one-off thing if you properly report your expenses in subsequent years. But #1 is a serious matter that gambles on having a higher than projected income in the future.

  • How exactly is not reporting expenses "fraud"? I certainly don't bother to keep track of trivial business expenses (or things that are debatable), or bother to deduct them. – jamesqf Apr 10 at 17:15
  • @jamesqf Thanks for asking. If the amount was trivial, it wouldn't matter either way. The fact the OP was sufficiently concerned to ask a question here suggests it is a non-trivial amount. It's not a problem with the tax office - I expect they'd happily accept the extra tax. But representing to the bank (via tax statements in this case) that one's disposable income is significantly higher than it actually is, so that the bank lends a quantum of money they wouldn't have lent if they knew the truth - that sounds iffy. – Lawrence Apr 10 at 22:17
  • Interesting. Thanks! I'm planning to make rental income from the property, and it will be in an area attractive to tourists, so I'm confident in being able to make it work (I did this with three homes that I rented at one time, and the landlords didn't know I did that, shhhhh). But the fraud thing doesn't sound good. I definitely don't want to get in trouble. Would the IRS wouldn't complain about the extra though? – trusktr Apr 12 at 1:18
  • @truskr I doubt the IRS would complain about getting more tax. But if the loan repayments can’t be sustained, the bank might be unhappy about an inflated ability to repay. – Lawrence Apr 12 at 1:27
2

No. 1. you don't want to get a mortgage you can't service. 2. Getting a mortgage in the US of A is a borderline joke (pretty much if you can fog up a mirror, they give you a loan), unless you are of the wrong color then it might be a different kind of a joke (from what I hear)...

Either case, fudging your expenses on your tax returns would be of marginal to nonexistent value.

  • 1
    Not quite so simple. True if you have W2 income, not so true if you're self-employed. See for instance the problems that (former Federal Reserve chair) Ben Bernanke had trying to refinance his mortgage: nytimes.com/2014/10/03/upshot/… – jamesqf Apr 11 at 17:57
  • @jamesqf: You do have an excellent point!!! My parents fall into that category. If you have non W2 income... yes in that case you would have to save up a bigger down payment... Or you could go to a banker / mortgage lender who understands that kind of situations... – sofa general Apr 11 at 19:30
  • I have both W-2 and self employment (rentals on the side). – trusktr Apr 12 at 1:19

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