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Self-Employed Refinances Impossible With Bogus Tax Returns

[Jan 14, 2010.]


So, it's tax season once again. For 2009, there have been many tax changes in favor of the lower income taxpayer, such as the increase of the Earned Income Credit and the increase of the Additional Child Tax Credit. In plain English, lower income tax filers with children are getting humongous federal refunds.

However, self-employed individuals who will be looking to refinance a home loan anytime soon--soon in this case meaning within the next three years--should definitely think twice before basing their entire tax report on getting the biggest possible refund right now.

Far too often, self-employed people do not realize the refinance ramifications of underreporting income on tax returns.

The Death of the Stated Income Loan

Rarely does a writer get to use the "the death of" convention without forcing it. But stated income loans, always a favorte of self-employed refinance applicants, truly are pretty much deceased.

The stated income loan was abused so thoroughly during the early part of the 21st Century that it came to known as the "liar loan." A stated income refinance is when a self-employed borrower does not submit tax returns, but rather tells the refinancing bank their income and the bank believes that number.

Or at least pretend to believe that number, in order to fund a loan.

Banks, except in extremely rare cases, no longer play that game. This elevates the importance of tax returns in the self-employed refinance process. Without a tax return showing that a certain level of revenues were reported, and the tax on those revenues reported, self-employed home loan borrowers are going to have a very difficult time refinancing a home loan.

Other Refinance Problems With Underreporting Self-Employment Income

The refinancing problems that may be caused by underreporting self-employment income on a tax return are many, including:

-- Does the bank really want to lend to someone that lies on their taxes?

-- What if the IRS or state tax authority audits the return, seeks repayment of taxes, and then places a lien on the house to get their money? The bank doesn't want that, and fears it greatly.

-- Without a consistent history of the business producing profits, does the bank have enough confidence in this environment to take a flier on a struggling business?

The bottom line here is that self-employed borrowers need to think before underreporting income on their tax returns because it can cause problems with refinancing.

Of course, the problem for many self-employed borrowers with reporting all income received is that in that case, the taxes they would owe would be quite high, maybe even unbearably so.

In that sense, some self-employed taxpayers are in a bind.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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