I am applying for a mortgage and was wondering if anyone knows how mortgage companies analyze a borrower's income for purposes of underwriting. My adjusted gross income on my tax return has been reduced by more than $18,000 due to adjustments for purchase of health insurance premiums (I have an S-Corp) and a $8k contribution (my wife and I) to an IRA. Does an underwriter look at total income on your tax return or adjusted gross income? If they look at adjusted gross income it looks like it may be a good idea to hold off on the IRA contribution this year.
Any thoughts?

lawadvocate said:I am applying for a mortgage and was wondering if anyone knows how mortgage companies analyze a borrower's income for purposes of underwriting. My adjusted gross income on my tax return has been reduced by more than $18,000 due to adjustments for purchase of health insurance premiums (I have an S-Corp) and a $8k contribution (my wife and I) to an IRA. Does an underwriter look at total income on your tax return or adjusted gross income? If they look at adjusted gross income it looks like it may be a good idea to hold off on the IRA contribution this year.
Any thoughts?

They should look at your recent pay stubs. They just look at the tax returns to show stability in your income. I don't think they will care if your AGI is less because of deductions.

They care about reasonably predictable income and stability. IRA deduction are insignificant. First because those are voluntary. It's understood that should you have financial trouble, you won't make those contributions. On the contrary, those show some kind of financial discipline to save money for retirement. Usually that goes hand in hand with financial responsibility and planning. Plus hey, it's assets that could be tapped if push comes to shove. It doesn't hurt your case.

If you're really concerned, make Roth IRA contributions instead of skipping a year. It won't decrease your AGI and you still don't miss contributing that year. Besides, most underwriters now ask for the last two years of W2s/tax returns, or even 3 years worth of tax returns for self-employed, so you'd have to miss out longer than just one year. Not worth it and again those are voluntary income reductions. It just means that you can afford more than you're living on currently.

Health insurance is a more mandatory reduction of effectively available income. You may cut down on coverage to save on premiums in tough times but it'll still take away some of your income. So they'll likely factor that in.

If you are self employed and applying for a Conventional or FHA loan, underwriters will ask to see 2 years of tax returns to see your adjusted gross income. They will use this income plus any depreciation that you may claim on your Schedule K (I think that right. Forgive me if I get schedule wrong). This is because as you stated you write alot of expenses off your gross income. Since you dont pay taxes on that money unfortunately you don't get to claim it as income. They will take typically a 2 year average of your tax returns and typically look at a profit and loss statement to establish reasonability of continued income.

If you are W-2'd but receive more than 25% of your income in commissions then they will ask to see your Form 2206 that you filed with your tax returns. This is where your wrote off expenses associated with your job but were not reimbursed for. They will subtract out what you wrote off in expenses and take a 2 year average of adjusted commissions.

Unfortunately most stated programs are now gone that would allow someone like you with good credit to state their income and get a loan with a 10% or greater down payment. Hopefully you have enough income in your AGI to support your debts.

I hope this helps.