How Does an Amended Tax Return Affect a Mortgage?

A home is not considered sold until the bank approves your loan and releases the money to buy it.
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Making the decision to purchase a home means that you're ready for responsibility and a long-term commitment. Mortgage lenders use your most recent annual income to determine whether you qualify for a loan. Banks and lenders will usually ask to see a copy of last year's tax return to prove your eligibility. An amended tax return could affect the bank's decision if your reported annual income drops significantly.

Amended Tax Returns

Oversights are a common reason why someone would need to complete an amended tax return. You might move across the country to accept a new job or promotion and forget to claim moving expenses, for example. An amended tax return allows you to correct the mistake and reduce your taxable income. Significant reductions in taxable income are importance since it might mean that the IRS owes you a refund or a larger refund. Anyone can file an amended tax return within three years of submitting the original form.

Proof of Income

Besides proof of income, a mortgage lender uses your tax return to determine your debt-to-income ratio. If you make $50,000 per year, have $70,000 worth of student loan debt and apply for a $200,000 mortgage, chances are your debt-to-income ratio is too high. A lender may also ask for copies of your W-2 forms to check for any discrepancies between the wage amounts reported by you and your employer. If you are self-employed, the lender may ask for copies of your 1099 forms.

Application Status

While individual lender rules may vary, the bank may need copies of both your original and amended tax returns if the amended return is filed before you submit your mortgage application. If you file an amended return after you apply for a mortgage, the lender may need proof that you paid any tax you owe and an official reason for the amendment. Filing an amended tax return could delay approval of a loan application. Your potential lender will need to make sure that your reported income still meets the guidelines for approval.

Type of Mortgage

If you're a first-time homebuyer who decides to apply for an FHA mortgage, your required down-payment will be less than it would be with a conventional loan. As of 2012, the required down payment for an FHA loan was 3.5 percent compared to 10 to 20 percent for a conventional mortgage. Your down payment reduces the amount of the loan's principal balance and your expected monthly payment. Most lenders require a monthly income that is at least three times greater than the mortgage's monthly payment. An amended tax return that lowers your monthly income below this threshold might cause the bank to reject your application.

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