Does business loss in tax returns hurt?

No one can answer the question for a co-op board. You can read the new ability to pay rules from the CFPB here:

http://files.consumerfinance.gov/f/201301_cfpb_final-rule_ability-to-repay-amendments.pdf

This would be for conforming loans; it would not apply for nonconforming loans, or for loans that banks keep on their books, but given that this new "qualified mortgage" grants banks immunity from prosecution for bad loans, "unqualified" loans will be harder and harder to find.

Though it's hard to tell for sure as the rule hasn't been implemented yet, in general the underwriting standards are to average 2 years' worth of tax statements. If your income went up in the second year, they will average the two years. If your income went down, they will take the lower of the two years.

It will probably not matter to them that you closed the business, and nothing beyond 2 years will likely be considered. There is, however, a phase-in period when underwriters can look beyond the strict standards and make a decision based on other criteria.

It might also matter to them whether it was an active or passive investment, and therefore whether it was deductible from your employment income. So if it were a passive loss that did not affect your overall tax payable, and you bore the loss in cash, it might not affect their decision.

In all, it's really hard to tell. I recommend that you present your tax statements to a lender beforehand and ask them how they will treat your situation. You may have to approach several lenders, but you should do that before you start looking for properties. The mortgage market is nothing like it used to be, and IMHO it's way over-regulated at this point, but I'm not sure that there's anything you can do about it.

Thanks steve, helps a lot!

Good afternoon,

For mortgage prequalification purposes, a one-time expense/loss on your tax return will not affect your qualifications as long as you can support your assertion it was one-time. The fact the business is closed is a good start to meeting that support requirement. Prepare as much documentation as possible for the Underwriter.

I can't comment on how a Co-Op board might react to the same scenario.

Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
NMLS#3528

pimp

Sorry Mr. Mortgage, that is not necessarily true. You are a mortgage banker, apparently, not a mortgage underwriter. I just finished dealing with underwriters for 2 months. For the most part mortgage qualifications are based on 43% of adjusted gross income, which is the bottom line of page 1 of the 1040.

If there had been business income in the past, Schedules C, E, or 1120S, or others, then that amount is included in AGI. If AGI is lower in the most recent year than in the prior year, then the underwriters will take the lower figure. If it is higher, then they will average the two.

You MIGHT be able to convince an underwriter to exclude the loss, but in my first-hand experience many underwriters will require that you wait a year and file your next tax statements to prove that you have actually closed the business. Even then, if the loss affected AGI on the prior tax statements, they may take it into account.

Case in point, my rental property - they only counted the expense, not the income, because the income did not yet show up on my tax statements even though I had a contract and a check and could show the rent deposited into my account. It is a passive investment, which may be the case for realdeal. Since realdeal's business did not pay a salary, they will probably use his or her tax statements to see how the business affected his income and the 43% ratio.

Take another case in point, my home office deduction, which is nothing more than an allocation of my rent, which I wouldn't be able to take if I had a mortgage: they didn't care, they reduced my income by the amount of the deduction as it shows on the 1120S, even though it is an expense that I would no longer have.

BUT they count my health insurance premiums as INCOME because it shows up on the W-2 that my company issues to me, even though it is nothing but an absolute 100% expense.

Personally I think the new mortgage standards are crazy because they give more weight to what happened 2 years ago (the tax statements they use for the self-employed and those with passive investments or their own businesses) than what is happening right now, today, and the count expenses as income and take no heed of what your finances WILL look like, only what the DID look like, but that is the fact of the new mortgage standards.

So, realdeal, just get ready to talk to a lot of different people to see how they will treat your situation. What Mr. Mortgage Banker says MAY be true, but in my experience what my mortgage banker said was completely unrelated to what the underwriters had to say.

You can always buy a condo. As far as boards are concerned, most have become very conservative.

As far as getting financing, your contract of sale should have a financing clause in it

Ellen Silverman
Licensed Real Estate Broker since 1987
E.S. Funding Co.
Mortgage Broker
www.esfunding.instantlender.com
NMLS# 60631

Financing clause may not be enough. A preapproval letter is often needed; not prequalification, but preapproval, before a seller will even entertain an offer.