There was a rule that was a problem for some mortgage borrowers who had unreimbursed business expenses that they wrote off on their tax returns. Writing off your unreimbursed business expenses is great at tax time because it reduces taxable gross income, but when applying for a mortgage it results in less income being able to be counted towards qualifying. And this obviously creates unforeseen problems.
However, Fannie Mae has made a change effective immediately that will alleviate this problem for many people. For mortgage borrowers who earn salaried base pay, bonus, overtime, or commission income that is less than 25% of the borrower’s annual income, unreimbursed business expenses are not required to be deducted from the mortgage borrower’s qualifying income. If you earn commissions that are over 25% of your annual income, then the old rules will apply and you will have unreimbursed business expenses deducted from your gross income.
Fannie Mae says, “When evaluating commission income that represents 25% or more of the borrower’s total annual employment income, the lender must consider certain tax deductions reported on IRS Form 2106 (Employee Business Expenses) when conducting the cash flow analysis: Out-of-pocket, unreimbursed business expenses — These expenses must be deducted from the borrower’s income.”
So if you make a $100,000/year salary and that is your only income, but you have $10,000 a year in unreimbursed business expenses, the mortgage lender will not deduct the $10,000 in unreimbursed business expenses and will use $100,000 a year as your qualifying income.
If you make a $50,000/year base salary and you have $50,000 a year in commissions, and you have $10,000 a year in unreimbursed business expenses, the mortgage lender will deduct the $10,000 in unreimbursed business expenses and use $90,000 a year as your qualifying income since you earn commissions that are over 25% of your gross annual income.
If you work in an industry that does not fully reimburse you for certain travel and business expenses, it is important to ask your lender what type of loan you are applying for and if you’re qualifications will be impacted by unreimbursed business expenses being deducted on your tax returns.