Navigating Tax Season: Can I Apply for a Mortgage Before I File My Taxes?

One of the constants of life: taxes.

While no one enjoys filing, tax season is upon us. But one question comes up for a lot of new or even experienced homebuyers during this time: “Can I apply for a mortgage before I file my taxes?”

The answer is usually yes.

Today, we’ll explain how your taxes impact the mortgage process and what to consider, whether you’re self-employed or have a standard W-2. Make the complex a little easier, and learn everything you need to know about taxes and mortgage applications.

Why Do Lenders Care About Your Tax Returns?

One of the most important pieces of information lenders need from you is proof of income, and tax returns verify this information. In some cases, lenders will ask for one to two years of tax returns during the pre-approval and approval process, especially if you’re self-employed or have complex finances.

This will not only decide how much your mortgage is approved for, but it also helps lenders to determine how likely you are to repay your mortgage. Your tax returns prove consistent income and stability, making lenders and underwriters feel more confident in your approval and helping you to qualify for the best possible mortgage rate.

What Tax/Income Documentation Do You Need?

In most cases, documentation requirements depend more on your income type than the loan program itself.

• W-2 Employees: If you’re paid a regular salary or hourly wage, lenders typically rely on recent paystubs and W-2s. Full tax returns are not always required unless there are additional income sources.
• Self-Employed Borrowers: If you own a business or receive 1099 income, expect to provide the most recent two years of tax returns. Lenders use these to calculate your qualifying income after deductions.
• Borrowers Who Owe Taxes or Are on a Payment Plan: You may need to show proof of an IRS-approved repayment plan. Monthly payments could impact your debt-to-income ratio.

Loan programs like Conventional, FHA, VA, and USDA may have slight variations, but the biggest factor is how your income is earned and reported.

Can You Apply for a Mortgage Before Filing Your Taxes?

Yes, in most cases, you can apply for a mortgage loan before you file your taxes for the year. However, lenders will still want to see at least two years of tax returns or employment history, so if you don’t meet this requirement yet, it might be best to wait until after you file and reconcile your taxes for the year. Some loan types or lenders may want you to file before you apply for a mortgage, so have an open conversation with your lender if you’re applying during tax season.

What Happens If You Owe Taxes?

If you owe on your taxes, you’ll want to resolve them as soon as possible. Owed taxes are treated as a liability and may impact your debt-to-income ratio. In most cases, lenders will accept any IRS-approved repayment plan, but owing taxes may increase your debt-to-income ratio, impacting the amount you’re approved for in your loan. If you’re behind on payments or have unpaid taxes, you could be at risk of a tax lien, hindering the mortgage process significantly.

When possible, resolving any tax balance before applying can make the process smoother. If you need help walking through your specific tax situation, we’d be happy to help you find the best path forward to your new home.

What If You’re Expecting a Tax Refund?

Getting a tax refund while buying a home can be a great benefit! Whether you use it toward your down payment or closing costs, tax refunds can help reduce your out-of-pocket expenses. If you’re looking to close on a home soon, we’d recommend filing your taxes as soon as possible to get the refund without delay.

Special Considerations for Self-Employed Borrowers

In most cases, self-employed homebuyers will need to provide their tax returns as proof of a steady income; however, there are some cases where a lender may not need the full copies of your tax returns. Your lender will let you know when full copies are needed based on your financial situation.

An important consideration is your taxable expenses and write-offs. While it may be tempting to deduct as much as possible to save on taxes, you should keep in mind that any expenses that are deducted will not count towards taxable income, which is what lenders use to determine how much you can borrow. For example, if your self-employed work earns $90,000 annually and you deduct $50,000 in expenses, your lender will calculate your income as $40,000.

Also, keep in mind that any income that isn’t reported on your tax return generally can’t be used to qualify.

Should You Wait to File Before Applying?

In most cases, we would recommend filing taxes before you apply for a mortgage. If you’re getting a refund, filing can only aid in your house search, and if you owe, settling your taxes can make the process easier.

Filing before you apply often creates a smoother path to approval. That said, every situation is different, and timing should be based on your income and tax position. Some find it easier to let tax season pass before beginning their home-buying process. Others may be eager to find a home right away.

Either way, an experienced lender, such as the team at Chris Doering Mortgage, should be able to guide you through the best next steps to find your dream home.

Timing Your Mortgage Application the Right Way

Whether you’re in the midst of tax season or have already filed and want to find a home, Chris Doering Mortgage can get you pre-approved and help you find the best home-buying process for you. If you’re not sure what your next steps are, check out our homebuyer’s checklist—you’ll find all the information you need on what a lender is looking for and what you should do before coming to a lender.

Once you feel prepared, our team is ready to help you. Tax season doesn’t have to slow down your home search. No matter your tax situation, we’ll help you understand exactly where you stand and what steps to take next.