What do lenders look for on tax returns

This financial documentation will also include tax returns of 1 to 2 years. Perhaps most importantly, lenders use your tax returns to verify your income. Your tax documents give lenders information about your various types and sources of income and tell them how much is eligible toward your mortgage application.

Lenders use the income declared on your returns to determine the amount of money they are willing to loan you, as well as to assess your ability to repay the loan. Your reported income is also used to determine your debt-to-income ratio , which is simply the percentage of your monthly gross income that is used to pay your monthly debts. They will also ask you to fill out a form T, which is a request for tax return transcripts.

This is done to make sure everything matches up and to prevent fraud. Share this post. Blog Categories Loan. About Community Business Finance. Interest Rates. Property Ownership. SBA Loan Programs. Popular Recent. National Small Business Week May 06, These write offs can greatly lower the income reported on your tax documentation, and this can impact your ability to qualify for a mortgage. Additionally, self-employment income tends to fluctuate from year to year.

But if your income declines from one year to the next, lenders may use the lower number for qualifying purposes. Lenders will usually ask for the last two years of tax returns. They will need all schedules so that they can see how much income you claimed, what expenses you wrote off, and your net income. Unlike when you work for someone else, your lender will need to use your net income rather than your gross income only because all of the expenses of owning a business are your responsibility.

Using tax returns also allows lenders to take a 2-year average of your income. When you are self-employed, you likely deal with highs and lows when it comes to your income. During the busy months, things are great financially.