Taxes While Young & Taking Out Loans

7 Replies

Here's my unique situation and question.

I'm 20 years old. Last year I made $20k and paid taxes for the first time, about $700. This year I opened my business up and made around $100k net. I have not done my taxes yet.

I want to be able to take out loans with banks for RE deals later this year and next year. My credit is good, in the low 700s. I've never taken out any loans. My question is this: Will paying more in taxes on purpose this year help me get a loan with a bank? A secondary question: Is it a good idea to take out a loan (for example, a car payment) to improve my credit score even further?

@Ty Frankel - Was the $20k from the same income source as the $100k?

They will use the average of the most recent 2 years as income if it is the same source.  So if it was the same business on paper you will make $60k a year

If the $20k was for a part time job and the $100k was from a new business venture then you will need another year of the new business income to be able to use it 

Originally posted by @Brie Schmidt :

@Ty Frankel - Was the $20k from the same income source as the $100k?

They will use the average of the most recent 2 years as income if it is the same source.  So if it was the same business on paper you will make $60k a year

If the $20k was for a part time job and the $100k was from a new business venture then you will need another year of the new business income to be able to use it 

It was from a new venture from the same source. Pretty much the same thing that I scaled and expanded on. It'll be classified as the same source as the $20k in 2016.

Is $60k/year/low 700s credit score enough for a bank to go off of in giving you a loan?

@Ty Frankel - that depends on DTI. 60k a year / 12 = $5k x 45% = $2,250

$2,250 will be your max payment with taxes and insurance if you have no other debts. Say you have a $500 car loan, now your max PITI is $1,750

@Ty Frankel Traditional lenders who give the best rates often look at how successful the business/person is via tax returns. Lenders feel the more taxes one pay based on personal or business profits is an indicator that a loan can be payed back... The more profits and taxes, the more comfort the bank will be lending its money...

Lower 700s is better than most and it sounds like you’re headed in the right direction. Honestly I wouldn’t take out a car loan unless you’re gonna pay it off that same year. Housing and car loans are probably people’s biggest expenses and it’s not really worth it imo. I’d rather use the hundreds of dollars a month for...anything else haha. Just my 2 cents.

Originally posted by @Ty Frankel :

Here's my unique situation and question.

I'm 20 years old. Last year I made $20k and paid taxes for the first time, about $700. This year I opened my business up and made around $100k net. I have not done my taxes yet.

I want to be able to take out loans with banks for RE deals later this year and next year. My credit is good, in the low 700s. I've never taken out any loans. My question is this: Will paying more in taxes on purpose this year help me get a loan with a bank? A secondary question: Is it a good idea to take out a loan (for example, a car payment) to improve my credit score even further?

Q1. You should take all legitimate steps to mitigate your tax liabilities. 

Q2. No. 

My question is this: Will paying more in taxes on purpose this year help me get a loan with a bank? 

You should report a legitimate tax return. You are signing a return indicating that it is correct. Also lying on a tax return to qualify for a larger loan may be considered fraudulent.

A secondary question: Is it a good idea to take out a loan (for example, a car payment) to improve my credit score even further?

In the immediate future - it will ding your credit score because it will be a hard pull on your credit.
Whether it helps your credit in the long term depends on if they report to the credit agencies. 

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