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Getting approved for a Home Equity Line of Credit (HELOC) can be a complex process, but one thing's for sure: tax returns play a crucial role in the approval process.
Most lenders require two years of tax returns to assess your income and creditworthiness. This is because tax returns provide a detailed picture of your financial situation.
Having a stable income and a good credit score can significantly improve your chances of getting approved for a HELOC. In fact, a credit score of 700 or higher can make a big difference.
The lender will also use your tax returns to calculate your debt-to-income ratio, which is the percentage of your monthly gross income that goes towards paying debts.
Requirements for Self-Employed Borrowers
As a self-employed borrower, you'll need to provide more comprehensive documentation to qualify for a home equity loan. Lenders view self-employed individuals as higher risk, which is why they require extra paperwork.
Tax returns will be the main determining factor lenders use when evaluating self-employed homeowners. This means that certain deductions, while they may have helped reduce your taxable income to the IRS, could end up hurting you when it comes time to apply for a loan.
A business that earned $100,000 in income for the year but wrote off $40,000 in expenses may be qualified for a home equity loan based on $60,000 in income. This example illustrates how lenders calculate income for self-employed borrowers.
Self-employed borrowers should be aware that lenders will scrutinize their tax returns closely, looking for any discrepancies or unusual expenses.
Lender Evaluation of Self-Employed Homeowners
As a self-employed homeowner, lenders will evaluate your income based on your tax returns. Tax returns are the main determining factor lenders use when evaluating self-employed homeowners.
Lenders view self-employed borrowers as a higher risk of default, so documentation requirements tend to be more comprehensive. This is especially true for home equity loans.
Your business expenses, such as deductions, can affect your qualified income. A business that earned $100,000 in income for the year but wrote off $40,000 in expenses may be qualified for a home equity loan based on $60,000 in income.
Lenders consider your taxable income, not your take-home pay, when evaluating your loan application. This means that certain deductions, while they may have helped reduce your taxable income to the IRS, could end up hurting you when it comes time to apply for a loan.
Tax Returns and HELOC
Tax returns are often required for a Home Equity Line of Credit (HELOC), but there are some exceptions. Most lenders will ask for your most recent two years of personal tax returns, specifically the first two pages and any additional schedules filed with the IRS.
You'll need to provide the most recent copy of your tax returns, especially if you've filed an amended return afterward. If you've filed an extension, lenders may request proof of payment for any estimated taxes owed.
Not all lenders follow the same methodology for evaluating income, but Fannie Mae's income worksheet provides a general guide. This worksheet details which line items on your tax returns can be added or deducted from your business income.
Some lenders may have slight variations in how they evaluate income, but since most conventional lenders sell their loans on the secondary market in accordance with Fannie Mae guidelines, the income worksheet should give you an accurate representation of how most lenders will determine your qualifying income.
If providing tax returns isn't an option, there are alternative options available. LBC Mortgage offers alternative documentation processes, such as using 12-month bank statements, a Profit and Loss statement, or a 1099 form to document your income and qualify for a HELOC.
Here are some alternative options for securing a HELOC without tax returns:
- Bank Statements: Use 12-month bank statements to analyze your deposits over the 12-month period.
- Profit And Loss Statement: Use a Profit and Loss statement for your business from the most recent 12 months to analyze your revenue versus expenses.
- 1099 Option: Use the income reflected on your 1099 form to qualify for your Home Equity Loan.
- Verification of Employment (VOE): Use a Verification of Employment form to determine your income if you are employed and work on a W-2.
- Private Lenders: Consider working with private lenders that may have more lenient requirements.
It's worth noting that if you're self-employed, most HELOC/home equity loan programs will require your most recent 2 years of tax returns to calculate your income.
Income Verification for HELOC
Income verification for a HELOC can be a bit tricky, especially for self-employed homeowners. Lenders typically review your most recent two years' worth of tax returns and take the most conservative average between those years in determining your ability to repay the loan.
For self-employed borrowers, tax returns will be the main determining factor lenders use when evaluating income. This means that certain deductions, while they may have helped reduce your taxable income to the IRS, could end up hurting you when it comes time to apply for a loan.
If providing tax returns isn't an option, there are alternative income verification programs available. For example, you can use your 12-month bank statements, either business or personal, to show consistent deposits. Alternatively, you can use a Profit and Loss statement or a 1099 to document your income and qualify for a HELOC.
Here are some alternative income verification options:
Income Trending
Income trending is a crucial aspect of the HELOC application process. Lenders typically review your most recent two years' worth of tax returns to determine your ability to repay the loan.
In most cases, lenders will take the most conservative average between the two years. This means that if you had a significant increase in income last year, they'll likely average it with your lower income from two years ago.
For instance, if you made $50,000 two years ago and $75,000 last year, the lender might average those two numbers, which would be $62,500.
Lenders will also do the opposite if your income decreased last year. They'll credit you for a one-year average in income, which can be beneficial if you're experiencing a temporary dip in income.
Here's a summary of how income trending works:
Securing a Home Equity Line of Credit
Securing a Home Equity Line of Credit can be a challenge, especially for self-employed individuals or those with irregular income. Most lenders require extensive documentation, including tax returns, to assess your ability to repay the loan. However, there are alternative options available.
For self-employed borrowers or those with irregular income, using 12-month bank statements is a viable option. Lenders can analyze your deposits over the 12-month period to determine your income. This is especially helpful for those who can't provide tax returns.
A Profit and Loss statement can also be used to verify income, but it's currently only available for Home Equity Loans and not for HELOCs. For self-employed borrowers who work on a 1099, you may use the income reflected on your 1099 to qualify for your Home Equity Loan.
In some cases, a Verification of Employment (VOE) form can be used to determine your income. Your HR department will need to complete a one-page form that confirms how much you make, and the lender will use that to qualify you for the Home Equity Loan.
Traditional banks may not offer flexible documentation options, but private lenders might. These institutions often have more lenient requirements and can be more willing to work with you. However, private lenders usually offer short-term loans for a 12-month term.
Here are some alternative income verification programs available:
Securing a Home Equity Line of Credit
Securing a Home Equity Line of Credit without tax returns is possible, but it requires some alternative documentation. LBC Mortgage offers flexible options to traditional lenders.
You can use your 12-month bank statements to verify your income, which is especially helpful for self-employed borrowers or those with irregular income. This option is available for both HELOCs and Home Equity Loans.
A Profit and Loss statement can also be used to analyze your revenue versus expenses and determine how you'll manage new debt obligations. However, this option is only available for Home Equity Loans, not HELOCs.
If you're self-employed and work on a 1099, you can use the income reflected on your 1099 to qualify for your Home Equity Loan. No further income documentation is required in this scenario.
Verification of Employment (VOE) forms can also be used to determine your income if you're employed on a W-2 but can't provide W-2 forms or pay stubs. Your HR department will need to complete a one-page form that confirms your income.
Some private lenders may also offer flexible documentation options, but these institutions often have more lenient requirements and can be more willing to work with you.
Need Itemized Deduction for Home Equity Interest
To take advantage of the home equity interest deduction, you'll need to itemize your deductions. This means you'll have to calculate your itemized deductions, including mortgage interest, and compare them to the standard deduction.
The interest deduction for a home equity loan or line of credit is only available if you itemize your deductions. If your itemized deductions are greater than the standard deduction, it might make sense to itemize and claim the interest deduction.
You can still use a home equity loan or HELOC for personal expenses, but you won't be able to take the interest deduction on the amount used for non-eligible purposes.
Sources
- https://housenumbers.io/blog/self-employed-heloc-home-equity-line-of-credit/
- https://lbcmortgage.com/no-tax-return-home-equity-line-credit-heloc/
- https://ficoforums.myfico.com/t5/Mortgage-Loans/HELOC-Unfiled-Tax-Returns/td-p/6767952
- https://spiritfinancialcu.org/is-my-home-equity-loan-tax-deductible
- https://money.stackexchange.com/questions/63835/should-i-provide-documents-at-the-time-of-application-for-a-heloc
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