Question On Underwriting Guidelines For A 1st Mortgage (income tax, credit, deduction)

[jpete1966]

I recently inquired about a 1st mortgage from a mortgage broker. I'm self employed and asked the mortgage broker if two items on my tax return would affect my DTI ratio. The first was the 1/2 self employment tax that gets subtracted from my taxable income and the second was a carryover loss from stock sales in 2008. His underwriter says that these two items will be counted against me reducing my net income and the amount I can borrow.

Is this right? I don't think it is. The 1/2 self employment tax credit just reduces my taxable income but not the actual income I made in 2009. The 3,000 deduction for a loss in the stock market is a carryover from 2008 as I did not own or lose money in any stocks in 2009. Shouldn't both of these items be added back into my net income when figuring out a DTI requirement?

[SmartMoney]

Unfortunately, that is correct. For self-employed the adjusted income is use, or the income after self-employment taxes are paid. Basically, anything that reduces your taxable income. The exceptions (and added back in) are depreciation and depletion, IRA accounts opened on the front section of the 1040 (near where the self-employment tax is).

Capital gains and losses are averaged over two years, so the fact you took half in 2008 and the other half in 2009, is really the same, anyway you cut it.

If you really want to see how it's calculated, I have attached the Fannie Mae Self Employed Income Analysis. I can't argue the merits of why they do it the way they do (for example, if you have a car that is written off at 80%, you can't take 80% of the car payment off, with most lenders).

[RBH]

Jpete, SmartMoney is not correct. It’s not the merits that one would need to argue....but rather a comprehension of the FNMA form. if you don’t understand what the numbers represent, when they apply and how to properly input the numbers then your answer will be crap. JUNK-IN-JUNK OUT.

1. one half self-employment tax- you are 100% correct that The 1/2 self-employment tax credit just reduces my taxable income and should ABSOLUTELY be added to income if you are using "adjusted gross income" (line 37 on the 1040. You would not add back to income if you are using "total income" (line 22 on the 1st page of the 1040).

2. Tax-Loss Carry-Over--You described a NON-RECURRING event which is NOT deducted from income. When no tax liability exists and total taxable income is negative, a Tax-Loss Carry-Over in the amount of the negative taxable income is established. This carry-over lasts a maximum of eight years- three prior and five succeeding- and must be applied to the earliest year first. A tax refund is generated if the Tax-Loss Carry-Over reduces the prior year's previously computed income tax. Any excess or unused Tax-Loss Carry-Over is then carried to the following year which is also recalculated in a similar fashion. A realized capital loss from the selling of investments which is not
offset by realized capital gains in a particular year may also be used over an eight year period in the same manner as described above, but only to offset realized capital gains. However, the amount which can be carded back is limited to an amount which does not cause or increase a net operating loss in the carryback year.

hope this helps