Educators beware. The next time you buy supplies to help out your school and then take the 2106 expense deduction on your tax return, it could cost you approval of your home loan.
A teacher was declined this week because the lender lowered their salary by the amount of employee related expenses they showed on their most recent tax return. This teacher was merely trying to refinance an existing home loan into a lower payment rate. Perfect credit history, good equity in their property, and adequate cash reserves were not enough as the bank slashed their monthly qualified income.
Lenders are sending verification forms to the IRS and getting a printout of everything that you report, including all of your itemized deductions.
For years teachers have been voluntarily supplying their schools and classrooms with ink, toner, paper, craft supplies and items needed to do their jobs effectively. Under IRS rules, these expenses, when not reimbursed by the employer, can be included on the schedule A form of the tax return provided they itemize their deductions.
Teachers often have a difficult time adequately performing their roles as our youth's educators when they are not furnished with proper supplies to do their jobs well. So these underpaid heroes are voluntarily taking their personal funds and buying the supplies their districts should be furnishing. This voluntary expense, a form of charitable contribution if you will, is now being used against them and will hurt them the next time they apply for a mortgage loan.
Congress has mandated that every person who gets a mortgage loan must qualify for the payments. That makes sense -- doesn't it? Or does it? Under these new laws our mortgage parents, Fannie and Freddie, have become the income cops.
Qualifying for a mortgage loan comes down to calculating the numbers. Under standard underwriting practices ratios are used to determine the amount of mortgage debt that a person can reasonably afford to handle. Housing expense which includes principal, interest, property taxes, insurance and any other direct expense like homeowner fees should not exceed a designated percentage of your income. Likewise your total debts, when added to your housing expense, need to stay in an acceptable range. Ratios vary but generally an acceptable housing expense ratio is around 33 percent of your gross income and total debt should not exceed 41 percent.
Simple math -- right? Wrong
Calculating the housing payment is easy. Figuring out what a person really makes for income may be more difficult.
In addition to a teacher's annual salary, it is not uncommon for them to supplement their income with after school activities. Coaching a sport, driver's education, music and art activities and summer school are but a few of the many ways that our teachers contribute to the betterment of our youth and their own financial needs. Much of this income, however, can be disallowed unless it can be shown to be continuous and guaranteed.
Teachers are getting the short end of the stick when underwriters disallow portions of their income and then write down salaries by expenses paid on a voluntary basis.
The housing crisis, brought on by inadequate underwriting standards, is being further fueled by the lack of common sense when it comes to calculating the numbers. Underwriters are shaking in their boots every time they approve a loan for fear of the wrath of the mortgage giants.
The pendulum of approving everybody for a loan during the subprime era days has swung to the extreme of denying qualified homeowners a chance to improve their financial situations. Isn't it logical to assume that if a homeowner has a history of faithfully making their mortgage payments they will not default with a lower one?
The new rules of mortgage lending are extreme and discriminating against all homeowners, including teachers who are trying to better their financial situations in a very rocky economic time when even their employers may be facing bankruptcy.
In a state that has been threatening to issue IOU's to its educators, perhaps they need to start issuing charitable donation receipts to their teachers who continue to provide supplies. The mortgage gods don't reduce income by your charitable donations -- yet.