How coorelated are Tax returns to interest rates?

Question

Hi, I’ve been looking at potential rentals and in the process have found a home my wife and I are interested in buying for ourselves. I spoke to the realtor and feel like we don’t have to get in a big hurry because homes are moving slow in this area (rural area). My concern with making an offer before my taxes are complete is that I’ve heard a lender typically wants 2 years tax records. I started my current job in 2018 and got a substantial raise. If I provide my 2 yr tax records right now, it would be for 2017 & 2018 (45k and 72k) vs if I wait until the end of February when my 2019 taxes are complete, my 2 yr tax records will show 72k and 94k. Is this worth waiting until my 2019 taxes are prepared?

Will this alone make a major difference in interest rates or are there other variable to consider. Also, I have around 18% to put down if that matters.

Wayne Brooks · Answer

Your income, more importantly your DTI, is simply a pass/fail criteria....no effect on interest rate. Your LTV will affect the rate and your credit score can affect your interest rate.

Account Closed · Answer

Hello Jesse!  I have a couple of opinions to share with you.  It's great to have your wife on board with you.  That is not always easy, know matter how much you might know.  My.wife, who died from cancer in September was so so brainwashed that she did not believe in taking any risk.  Even though we lived together for about 42 years and I had a broker license in Texas and ran several construction companies and ran my own business for about 30 years and lived my whole life around Dallas, she was not willing to invest any of the money she had been saving for 35 years.

She kept all of her money in the stock market that did well because of Trump and she did not believe anything he said.  She was always a Democrat and I was always a Republican.  So we always disagreed on politics.  That all being said, I want to say that I care about your situation.  The are different ways to get money and you need to be creative and organized at what you do.

There is a tax situation that effects your decision.  They are called ordinary and passive income and the passive (rentals) is lower taxes than ordinary (like flips).  Your income will matter differently depending on your lender and if you have a rich partner.  If you go to a regular bank that will matter greatly to them except if you use a cash rich partner.

The bank is more concerned about your current income than Private or Hard money lenders.  You might have to wait if you are going to a regular bank.  You might need to hire hire an experienced tax consultant to help you go down the right path with income tax consideration.

In my 5 or 6 years of access to this website on a full time basis, I have never heard that the interest rate matters on any deal, just know what you'll be paying when you do an evaluation or figure the worst case scenario.  Be aware of the loan market so you can know its rates and deposit requirements that will help you do evaluations.

The 18% will matter.  Again it matters who you are borrowing from or if house hacking or partners come into the play. Tax returns will matter depending who you are borrowing from.  Some require that and some do not.  Don't forget that owner financing is usually more available and flexible.  I could go on but I'll spare you.

Good luck to you both!

Joe Splitrock · Answer

I think this would be either 1099-DIV for dividend or 1099-B for sale. I thought both were due to be sent by the end of January but I could be wrong.

This does bring up a good point, if some of your income is derived from passive investment activities, it may be better to wait for your taxes.

Odie Ayaga · Answer

Geez @Wayne Brooks you're up to 20k posts?? Yea from what I've seen pass/fail as well, but take the guy with 20k posts more than me. Just to add on if you offer to take a lower LTV you can get a better rate

When you say looking to buy for yourselves I'm also assuming you don't mean buy and move into a unit in a multi?

Jesse Aaron · Answer

@Joe Splitrock

Hey Joe, I have stock and etf income to consider as well beyond the W2. I won’t have those forms until late February.

Joe Splitrock · Answer

@Jesse Aaron as others mentioned, they look at your current income based on last two pay statements. That being said, employers are required by law to have all your tax information to you by the end of January. You should be able to file your taxes next week.

Jesse Aaron · Answer

@Chris Mason

Ahh got ya. That makes sense.

Craig Jeppesen · Answer

What you are asking is more important for the dti calculation not for interest rates. Your interest rate is determined by the market rate, your credit score, and down pmt amount. Dti is a calculation where the bank will compare your monthly payments compared to your monthly income and if the ratio is below a certain percent (usually around 42%) you qualify for the loan. They take 2 years of tax returns to calculate the income side of the ratio. If you have more debt you might need to wait. If you have low debt payments your current taxes might suffice.

Chris Mason · Answer

Hey, Hammond, I have family that live there. :)

No, I said they will not be using your historic tax returns to calculate your income. They will be using your actual current income as documented by a verification with your employer, paystubs, etc. Calculations based on tax returns are for self employed folks, or folks who are employed by their immediate family (since, otherwise, dad could just juice up a paystub to get his son out of the basement and into his own house).

Jesse Aaron · Answer

@Chris Mason

Chris, can you expand on that? You’re saying a lender doesn’t care whether a borrow makes 30k annually or 150k? That doesn’t seem wise on the lender’s part.

How coorelated are Tax returns to interest rates?

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