Top 5 Year-End Tax Tips for 1099 Medical Professionals

Top 5 Year-End Tax Tips for 1099 Medical Professionals

Tax Tips For Doctors & PhysiciansBy John Golway, CPA and Founder of Financial Designs Tax Services, LLC

It’s that time of year… cheery music, crisp weather, shiny lights… and wrapping up your taxes for 2018. Not only do you have the regular tax “to-dos”, but there are also new tax rules to be aware of thanks to tax reform (don’t panic – there is a good chance the new rules will save you money). See below for our top 5 year-end tax tips for 1099 medical professionals.

1) Reduce Your Taxable Income

To ensure you are maximizing your tax savings, you want to reduce your taxable income as much as possible. Here are some key items you can deduct as a 1099 provider:

  • Health insurance premiums
  • HSA contributions
  • Retirement contributions
  • Deductible business expenses (note: relocation expenses are no longer deductible)
  • Heavy vehicle purchase
  • Qualified Business Income (QBI) – new with tax reform! See a full explanation here.

 2) Pay Attention to Retirement Contribution Maximums and Funding Deadlines

As a self-employed medical professional, you have a few options for retirement savings, and many times this can be one of your biggest deductions. The two most common accounts for 1099 providers are the SEP IRA and Solo (or “Individual”) 401(k). The maximum you can contribute is $55,000 (with a $6k “catch-up” option for the Solo 401(k) if you are 50+ years of age). Each plan has its own advantages. The Solo 401(k) allows you to also fund a Roth IRA if it makes sense to do so. A lesser known fact is that a Defined Benefit Plan can allow you to save well over the typical $55,000 (more than $100k for some of our clients). Work with your financial adviser and CPA to determine the right retirement savings strategy that maximizes your tax deductions.

Additionally, note the deadlines for opening and funding these accounts:

SEP IRA

Solo 401(k)

Defined Benefit Plan

Account Open Deadline

Tax Deadline*

12/31/18

12/31/18

Account Funded Deadline

Tax Deadline*

Tax Deadline*

Tax Deadline*

*Should you file an extension, use the extension deadline to determine your open or fund deadline.

3) Determine If You Can Take Advantage of the New QBI Deduction

The new QBI deduction is a huge deal. Historically, your retirement contribution was likely the largest deduction you were taking as a 1099 physician. It’s possible your QBI deduction might exceed your retirement contribution amount. The key is to lower your taxable income to be between $315,000 and $415,000 for married filing jointly (lower than $315,000 receives the full benefit), and between $157,500 and $207,500 for filing single (lower than $157,500 receives the full benefit). See a full explanation here. If you have an S Corp, you might want to consider if it makes sense to dissolve the entity, so you can take full advantage of the QBI deduction. See more here about entity formations and talk to your CPA.

4) Consider Tax Loss Harvesting

If you have stocks that are in a loss position (outside of retirement accounts), and you don’t expect them to rebound, you might want to sell them before the end of the year. If you have an overall loss, the maximum you can deduct is $3k (any excess carries forward). If you have any gains in the year, any of the loses offset the gains first, then you get a $3k tax deduction. If you do sell stocks at a loss, you cannot buy them back within 30 days.  This is called the “IRS wash-sale rule” and will disallow a tax deduction.

5) Familiarize Yourself with Other Tax Law Changes

The standard deduction was doubled. If your state/local/property taxes (cap at $10k), mortgage interest, and charitable contributions add up to lower than $24,000 for joint filing or $12,000 for single, then you will want to take the standard deduction. Some people are choosing to exceed the $24,000 with charitable funds deposited into a Donor Advised fund. This allows donors to receive an immediate tax deduction and then distribute funds at their discretion over time.  Contact your tax adviser for more details if applicable.

Also, you can now use 529 funds to pay for k-12 private education (up to $10,000 annually). Work with your financial adviser to determine if this is a good strategy for you and your family.

Don’t let the holidays get the best of your tax planning and preparation. For more information about how to find the best tax strategy for your situation, contact your tax professional or our experienced team. You can reach us at 888-898-3627 or make an appointment here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

 

 

Maximizing the New 20% Pass-Through Deduction

Maximizing the New 20% Pass-Through Deduction

Maximizing QBI Deduction

By Terry Westlund, Co-Founder

Remember the big hub-bub about tax reform almost a year ago? Although the new tax rules were announced at the end of 2017, they don’t take effect until you start working on your 2018 return. Therefore, many are just now starting to think about the changes. The good news? If you are a 1099 provider, you may have an opportunity to save thousands in taxes with the new Quarterly Business Income (QBI) deduction – also known as the “20% pass-through”. Before the new tax rules were finalized, there was question around whether medical professionals would be able to take advantage of this new rule. Just to be clear, this 20% pass through DOES apply to 1099 medical professionals… if you qualify….

So How Do I Qualify?

Before I answer that question, it’s important to be clear on how to calculate TAXABLE INCOME. Taxable income is simply your income minus any deductions or exemptions allowed in the tax year.

For married individuals, the goal is to reduce your taxable income to $315,000 to get the full benefit of this new tax rule. At this point you can apply a 20% deduction… $315,000 x 20% = $63,000. At a 24% tax rate, that saves $15,120 in taxes! Not too shabby. Does $315,000 seem like an impossible number to achieve? Ask your financial advisor about Defined Benefit Plans. If implemented appropriately, these kinds of plans can allow you to save upwards of $100,000 for retirement and therefore further reduce your taxable income.

If your taxable income is between $315,000 and $415,000 (for married filing jointly), you can still save on taxes through the phase-out portion of the new pass through rule (“dollar for dollar”). For single taxpayers, the taxable income limits phase out from $157,500 to $207,500.

Don’t forget as an independent contractor, you have many ways to lower your taxable income including deducting health insurance premiums, HSA contributions, 50% of social security & Medicare tax, retirement contributions (up to $55,000 in 2018 or $61,000 for individuals age 50+… more with a DBP as described above) and deductible business expenses. Historically retirement contributions were typically one of the largest deductions you can make. Now the QBI deduction has the potential to be an even greater deduction.

20% Pass-Through Deduction Example

Sometimes it is easier to explain tax rules with an example. John Doe, MD, an emergency physician, is married and has $440,000 of I.C. income. Here is how he will utilize this deduction:

Business Income

$440,000

Deductible Business Expenses

($16,000)

Net Business Income

$424,000

50% of S.S. & Medicare Tax

($13,500)

Health Insurance and HSA Contributions

($16,500)

Individual 401(k) Contribution

($55,000)

Standard Deduction

($24,000)

Taxable Income

$315,000

QBI Deduction

($63,000)

Net Taxable Income

$252,000

At a 24% tax rate, Dr. Doe will be saving approximately $15,000 in taxes by utilizing the new QBI deduction. Now that’s worth paying attention to!

What if my spouse generates W-2 income?

Technically the deduction is calculated from whichever is lower… your “Net Business Income” or your “Taxable Income”. If you only have 1099 income, your “Taxable Income” is usually the lower amount. If you have W-2 income to also account for, you may find yourself taking 20% of your “Net Business Income” as it may be the lower of the two. Here is an example: Ron has $300,000 of independent contractor income and his spouse makes $135,000 in W-2 wages:

Business Income

$300,000

Deductible Business Expenses

($15,000)

Net Business Income

$285,000

50% of S.S. & Medicare Tax

($10,000)

Health Insurance and HSA Contributions

($15,000)

Individual 401(k) Contribution

($61,000)

Standard Deduction

($24,000)

Spouse W-2 Income

$135,000

Taxable Income

$310,000

QBI Deduction

($57,000)

Net Taxable Income

$253,000

The pass through is calculated from the “Net Business Income” as it is lower than the “Taxable Income”, resulting in a deduction of $57,000 ($285,000*20%). This is still about a $14,000 savings in tax at a 24% tax rate!

Any other considerations I should be aware of?

Historically we recommended medical professionals making over $330,000 should consider forming an S-Corp to save more in taxes. With the new QBI deduction, work with your CPA to determine if the way your S-Corp is set-up truly maximizes your tax savings. You may need to make an adjustment to your flow-through income or consider dissolving the S Corp to take full advantage of the QBI deduction. For more information on entity formation, see one of our blog entries here.

For more details on how this deduction might work within your tax strategy, contact your tax professional or our experienced team. You can reach us at 888-898-3627 or make an appointment here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

LLC? S Corp? Where do I start?

LLC? S Corp? Where do I start?

By Nate Hansen, CPA

As a 1099 medical professional, you may have heard buzz around the need to consider forming an entity. The different types of entities can be confusing and can vary by state. The most important thing to remember is that everyone’s scenario is a little different. There are several factors that need to be considered, including level of income, marital status, location(s), etc.  Seeking professional advice is strongly recommended to ensure you select the right solution for your scenario. In the meantime, here are some basics to prepare yourself for that discussion.

Sole Proprietor

A sole proprietor is an unincorporated entity. This structure allows you the ability to write-off business expenses on the “Schedule C” form of your personal tax return (side note: business expenses incurred by someone employed in a W-2 position are no longer deductible as unreimbursed employee business expenses pursuant to the latest tax reform).  You can also take advantage of some of the new tax rules like the QBI 20% Pass-Thru deduction. Being taxed as a Sole Proprietor is a low maintenance option that doesn’t even require you to set-up an EIN (Employer Identification Number, aka Federal Tax Identification Number). If you are a 1099 physician, you file as a sole proprietor by default unless you set-up one of the entities described below.

Limited Liability Corporation (LLC)

Some employers require their 1099 medical professionals to set-up an entity, such as an LLC. This kind of entity may also provide some liability protection as it separates your personal assets from the business. While an LLC or other entity type may provide some personal liability protection, it typically does not cover any “on-the-job” protection; however, that should be covered by your malpractice insurance normally provided by the facility.  An LLC that is 100% owned by a single individual is disregarded for tax purposes and taxed as a sole proprietor, so all income and deductions are reported on your personal tax return.  It should also be pointed out that some states use a PLLC designation (Professional LLC) as opposed to a regular LLC for medical professionals, but there is no difference from a tax standpoint.

S Corporation

Prior to tax reform, an S Corporation was typically a great option for 1099 physicians who made more than $350,000 (in states that recognize this entity type). An S Corp is more expensive to manage but could provide more tax savings (particularly Medicare tax savings) resulting in more disposable income in your pocket.

Post tax reform, the $350k threshold is a little more complex. A new rule allowing a 20% pass-thru deduction (aka Qualified Business Income Deduction, aka QBI Deduction) is saving many 1099 physicians thousands in taxes, assuming they meet the income thresholds. See here for a short webinar  explaining how the QBI deduction works. With this new rule, only the S Corp “Pass Through” income qualifies for the QBI deduction (vs. your “Wage Income”). Ask a CPA to help you model whether or not a S Corp will maximize your tax savings in combination with the QBI deduction.

Myths

A common misconception is  whether or not you need to have an entity in order to hire your spouse. Or do you have to have an entity to create certain retirement plans or to deduct your business expenses?  The answer to those questions is “no”; you have the ability to do all of those things as a sole proprietor or LLC.  However, in order to pay your spouse a salary and/or open an individual 401(k) account, you would be required to get a separate Federal ID Number from the IRS.

As you determine if you have the right entity structure set-up for your business, work with a CPA to talk through the specifics of your scenario. In most cases, the complexity associated with this decision-making process warrants a phone call or an in person meeting rather than trying to talk through the logistics via email. You don’t have to do this alone!

Want to have a no-risk conversation with our lead CPA? See here to set an appointment with Nate Hansen.

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

 

The Devils is in the Details: Protecting Your Income

The Devils is in the Details: Protecting Your Income

By Gary Eickhorst, ChFC®

Your entire financial plan – your retirement contributions, your savings goals, your debt repayment plan – is likely dependent on your income. What happens if that income goes away? Did you know you are more likely to become disabled during your working years than you are to die?1 More than 25% of today’s 20-year-olds are projected to become disabled before retirement2.

As a physician, you have a lot at risk. Your job is physically demanding. Issues like cancer and heart disease only represent a portion of long-term disability claims. Back injuries, muscle and ligament issues, arthritis and mental health challenges could also prevent you from doing what you love. Those who take the time to address the potential risk are more likely to overcome the unexpected.

Unfortunately, not all plans are created equal and navigating this space to secure adequate coverage (at a competitive price) can be challenging. An independent broker can explain your options, compare rates from multiple companies, secure discounts and simplify the experience. There is no cure for bad insurance, so see tips below on what to look for when shopping for coverage.

When should I secure coverage?

Consider adding disability income insurance coverage to your financial planning strategy early on. Rates are based on your age when you apply so it will never be cheaper than RIGHT NOW. You can select a plan that locks in lower rates for the rest of your career. This savings can add up to tens of thousands of dollars over time. If you’re in residency and have limited cash flow, consider securing a modest policy. You can increase the benefit later on.

What is the difference between group and individual coverage? Do I need both?

w2 employees may have access to an employer-provided group plan. These plans tend to be less liberal (meaning the definition on “disability” may be stricter). Any benefits received are taxable, and depending on the plan, the benefit may only cover a portion of your income. Additionally, if you leave your employer, you can’t take the policy with you. On the other hand, group policies don’t require medical underwriting and are often inexpensive. Even if you have access to a group plan, it’s worth considering supplementing that coverage with an individual policy. In a claim situation, both policies would pay.

Individual policies are customizable, allowing for more liberal and comprehensive coverage. The benefits are received tax-free. Individual policies are portable, meaning you can take them with you from job to job. If you secure an individual policy early in your career, you can lock in a lower rate and reduce the risk of future medical issues disqualifying you from coverage.

It seems like individual policies have a lot of options and add-ons. Do I really need them? How do I pick?

A benefit of securing an individual policy is that it can be tailored to fit your individual needs. Unfortunately, it also makes comparing policies very difficult. An independent broker can explain which “add-ons” (also called “riders”) may be appropriate for you and compare rates from multiple companies. Depending on your situation, some riders won’t make sense for the cost. However, there are a handful of options you should consider:

Residual Disability Benefit: It’s not difficult to imagine going part-time after a back injury or while undergoing treatment for a major illness. If an illness or injury prevents you from working full-time, this rider provides a partial benefit. We ALWAYS recommend this rider.

Pure Own Occupation: If you have an illness or injury that prevents you from performing the duties of YOUR occupation, you will receive a full benefit – even if you are able to earn income in another specialty/occupation. For example, an emergency physician is in an accident and sustains injuries that prevent her from working in the ED. She is able to work in an administrative capacity as the ED Medical Director and also picks up shifts at a clinic. Between these two roles, she makes up most of her lost income. However, with the Own Occupation rider, she will also receive a FULL disability benefit because she can no longer perform the duties of an emergency physician.

Cost of Living Adjustment: Your monthly benefit won’t have the same buying power 10 or 20 years from now. The COLA rider provides inflation protection during a long-term claim by increasing your benefit annually (while on claim) to adjust for inflation.

Guaranteed Increase Option: This rider allows you to increase your benefit in the future without medical underwriting. It’s a good option for individuals that (1) expect their income to increase, (2) don’t currently have the cash flow to pay for a higher benefit, and/or (3) don’t want future medical issues to prevent them from securing additional coverage. This rider is usually inexpensive and simplifies future benefit increases by eliminating the need for blood tests and medical exams.

Level vs. Graded Premium: Rates are based on your age when you apply. If you select a level premium structure (which we recommend), your rates remain level to age 65. Graded premiums will increase annually and become significantly more expensive over time.

What is the difference between short and long-term disability coverage?

Short-term disability policies protect your income during short-term illnesses and injuries. Benefits typically start 14-30 days after a health issue arises and continue for 3 to 6 months. These policies can be very expensive and difficult to justify. Fortunately, if you have adequate emergency savings, you may not need one. We often recommend self-insuring for health issues that would keep you from working for only a few months – This simply means building your emergency savings so you can cover six months of income if necessary.

Long-term disability policies protect against a much greater risk: years or decades of lost income. These policies usually pay benefits after 90-180 days and continue to pay benefits until age 65, 67 or 70. We strongly recommend securing this type of insurance because a long-term health issue can wreak havoc on your financial stability. To cover the waiting periods, we recommend building your emergency fund in a way that you can ride the storm of 90-180 days of no income.

I have sticker shock. Do premiums vary? Should I shop around for individual long-term disability coverage?

Yes! Or even better, work with an independent broker who does the shopping for you. A broker can help you select the type of coverage you need, find the lowest possible price and even secure additional discounts depending on where you work.

Other ways you can reduce your premium:

  • Eliminate the catastrophic rider
  • Eliminate the waiver of premium rider
  • Women should ask about unisex rates. Because disability premiums are higher for women, unisex rates can lead to significant savings.
  • Self-insure to eliminate a short-term disability policy (as described above)
  • Consider a longer waiting period (perhaps 90 days instead of 60) or a shorter benefit period (age 65 instead of age 67 or 70).

When should I re-evaluate my existing coverage?

If you’ve recently changed jobs, review what benefits are offered and how you might need to supplement them. Marriage, child births and other significant life events are another time to re-evaluate your coverage. When others are depending on your income stream, you want to make sure you have the right plan in place.

If you have questions, we’re here to help. Contact us for more information on how disability coverage fits into your plan.

To make an appointment with me or my partner, Terry Westlund, click here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

1 https://www.forbes.com/sites/peterlazaroff/2018/03/18/how-to-protect-your-most-important-asset-with-disability-insurance/#5d81eacf5eed

2 http://disabilitycanhappen.org/disability-statistic/

 

 

 

New Physician, Big Paycheck

New Physician, Big Paycheck

By Jay Widler

Congrats! After years of hard work, little sleep and lots of determination, you have finished medical school and residency, and your paycheck finally reflects a physician’s salary. The jump from the average residency pay of $51,000 to a full-time physician salary is typically large. The change can be overwhelming to determine what do with the income surplus. See below for tips on how to lay a firm financial foundation and avoid potentially damaging mistakes.

Treat Yourself

Surprised we started with this piece of advice? You’ve worked hard to get to this phase in your life. You owe yourself a treat. However, before you go as far as a new sports car or an extravagant trip, read the below to ensure you have yourself appropriately set-up for financial success.

Eliminate Financial Risk

Healthcare costs are at an all time high. Although you may be able to self-treat many of your own health challenges, the unexpected can still wreak havoc on your finances. To financially mitigate medical surprises, secure adequate insurance coverage.

  • Health Insurance: Evaluate high vs. low deductibles and the use of HSA plans. If you are an independent contractor, work with a broker that can help you choose a plan that eliminates unnecessary costs.
  • Disability Insurance: Your income is your most valuable asset. Just over 1 in 4 of today’s 20 year-olds will become disabled before they retire*. Keep in mind accidents are not usually the culprit. According to the Council for Disability Awareness, back injuries, cancer, heart disease and other illness cause the majority of long-term absences. We could write an entire blog on what to look for in a disability policy (and we will in the near future). In the meantime, as you research coverage, be sure to include an “own occupation” rider.
  • Life Insurance: You may want a plan to provide for loved ones if you aren’t there to provide for them. However, finding the right policy – or policies – to meet your exact needs can be difficult. Work with a broker to compare the advantages of term vs. permanent policies to keep your premiums as low as possible while maximizing any future benefits.

Address Student Loans

You may have some whopping loans to pay off. You can see one of our recent blogs to learn more about how you might address this monster: http://financialdesignsinc.com/blog/five-tips-to-managing-medical-school-student-loans/ Be sure to work with a trusted advisor to determine how you should balance paying-off debt with saving. Although some people choose to start saving only after the debt has been addressed, there may be a more financially efficient strategy that involves doing both at the same time.

Start Saving for Retirement Now

“I sure wish I hadn’t started saving for retirement so early” – said no one ever.

We get it – retirement seems like a long way off… but remember that little thing called Time Value of Money? At the bare minimum, try to find a way to contribute enough to at least receive any kind of institutional match available to you. Additionally, if you are an independent contractor, you can save up to $55,000** a year in a retirement account. This may seem aggressive, but the positive effect on your tax bill might surprise you (not to mention the jump start on saving for your Golden Years). Work with a financial advisor who can show you hypotheticals to help determine what the right saving strategy is for your specific situation. Your advisor should also be able to account for your current debt and incorporate that into your plan as well.

Plan for the Worst – But Also Plan for Fun

You may have heard the rule of thumb to have enough savings to cover 3-6 months salary should an emergency arise. We couldn’t agree more. As Joan Rivers reminds us, “In life the only thing you can expect is the unexpected”. This savings account could also be used to fund little surprises like your home air conditioner going kaput or an unexpected car repair.

What people don’t talk about as often is funding the fun too. You deserve to enjoy your hard-earned paychecks both pre and post retirement. Make monthly contributions to a “vacation” fund and/or a “3-5 year” fund that allows you to do the things you love without having buyer’s remorse. This could be anything from a new car to a trip to Bora Bora to a remodeled kitchen.

Don’t Underestimate Ways to Reduce What You Owe Uncle Sam

For w2 and 1099 physicians, your HSA and retirement contributions are tax deductible. Make sure you are maximizing this benefit.

If you are a 1099 physician, you can also deduct health insurance premiums, business expenses, and you may be eligible to utilize the new QBI deduction which is literally saving many physicians thousands more in taxes. Work with a tax professional to make sure you aren’t paying a dime more than you owe.

Lastly, don’t get overwhelmed. As Dave Ramsey says, “Nothing happens without focus. Don’t try to do everything at once. Take it one step at a time”. Have questions? Don’t hesitate to reach-out for a discussion on how to tackle your specific financial situation. We are here to educate and remove any financial anxiety.

* http://disabilitycanhappen.org/overview/

** Individuals over the age of 50 can contribute up to $61,000 annually

Mortgage 101

Mortgage 101

By Rob Bland, Guest Writer, US Bank Home Mortgage

Securing a mortgage can be daunting and a tedious process. In fact, many feel like the job of a lender is to find a reason why the financial organization should not lend you the money. Contrary to that belief, as a lender our goal is to make the mortgage happen. See below for education on how the home loan process works and tips to navigate this process successfully.

What are my choices when selecting a loan?

Most likely you have heard of a conventional loan, but what does that really mean? A conventional loan is not guaranteed or insured by a government agency. These types of loans usually offer the best interest rates and loan terms, which can result in a lower monthly payment. Since these loans are not backed by the government, they are risker for the institution loaning the money and therefore there may be additional requirements the borrower must meet. When comparing a conventional loan to a government backed loan, the differences may include:

  • A larger down payment
  • A higher credit score
  • Proof of stable income/employment for a longer period

These 3 requirements may seem straightforward, but for many physicians just completing residency and/or establishing themselves as an independent contractor, meeting these requirements can be tricky. That’s where portfolio loans come into play. Portfolio loans are similar to conventional loans, but can offer expanded underwriting guidelines to accommodate variances in a borrower’s financial profile. Banks keep these loans on their books (rather than selling them in the secondary market) and therefore can create their own guidelines of what it takes to qualify for the loan. Typically, these loans have competitive interest rates and may offer features not available with a government backed loan. If you are a physician with limited cash and/or limited 1099 income history, research banks that offer portfolio loans for your situation.

Fixed Rates or Adjustable Rates?

How long do you plan on living in your home? If you plan on living in your home for a shorter period of time (maybe it is a starter home where you will live for 2 or 3 years), an adjustable rate might make sense because typically the interest rates are half a percent lower than fixed rates. Adjustable rate mortgages are 30 year loans and can fix the rate for 5, 7 or 10 years. However, if you plan on living in your home long term (more than 10 years), fixed rates provide more stability, which makes budgeting easier. When deciding between the two options, compare the payments over the period when the adjustable rate is fixed and see if it the savings and holding period for the home meets your financial plan.

When should I apply for a loan?

If you are thinking about purchasing a new house, contact a lender to establish what you are looking for and what you might qualify for. The current marketplace has been tough for buyers due to low inventory. This is resulting in quick sales with multiple offers. If you are seriously shopping for a home, you should start the mortgage process as soon as possible and do a credit approval. This will ensure you have the documentation needed to make a quick offer. The pre-approval paperwork is typically valid for 120 days.

Oh, the documentation! Remind me what I am going to have to dig up?

You may feel like the questions about your finances are endless when securing a mortgage. The underwriter looks at your income, assets and credit score. When there is a lot activity in any of those areas, it raises questions. The underwriter isn’t trying to be nosey, but he/she needs to connect the dots to ensure the established guidelines are being followed to successfully secure the loan.

Typically, underwriters look at your earnings for the last 2 years. This includes W-2/1099s and tax returns, and this documentation needs to be in a pdf format (not a picture taken from your phone). The underwriter will also need documentation of your assets and may ask questions about large deposits or withdrawals. Mortgage credit reports are a little different than the credit score that is used to buy a car or get a new credit card. There are about 40 variables that go into a mortgage credit score. Don’t be surprised if the score your lender records does not match what you have seen on other reports outside this process.

KEY NOTE: In anticipation of securing a home loan, do not pay off a credit card or student loan and close the account. This can reduce your credit history and therefore negatively affect your score. If you are in the home buying process, talk with a mortgage professional before you close an account.

If you are trying to qualify for a portfolio loan, the lender might ask for additional items like a copy of your medical license, certificate of residency completion, an employment contract, gift letter, etc.

What might keep me from getting a loan?

Debt-to-income ratios could keep you from getting a loan. This ratio represents the amount of monthly debt as a percentage of your monthly income and generally cannot exceed 43%. The underwriter wants to see that after you make your monthly payments that you have enough funds to cover your other bills.

For W-2 income, gross wages are used for the calculation (the amount of income before all the deductions come out of your pay check like federal income tax, 401(k) contributions, etc). As an independent contractor, underwriters use your net income (the amount of income after expenses are deducted) to calculate your debt-to-income ratio. If you are working for a few different facilities, the underwriter wants to see the income generated in the last 2 years and likelihood to continue for the next 3 years (for those just completing residency, the contract income is used). The underwriter may have additional questions to determine this.

What if your home loan application is rejected? Start by finding out why. Common issues include a low credit score and/or not enough income. Work with your lender to understand the steps you can take to avoid this in the future. If you feel your credit and income should support the loan request, try a different lender. Bunching your applications into a 30-45 day window will help minimize a reduction in your credit score from too many hard inquiries. In some scenarios you may be rejected because the house didn’t appraise. Work with your agent to renegotiate the selling price.

Closing

You thought you would never get here… closing day. There are two sets of paperwork you will be completing for this grand finale: 1) the agreement between you and the seller to transfer the property, and 2) the agreement between you and your lender regarding the conditions of the mortgage.

The day before closing, connect with your lender to ensure they have all the paperwork they need from you to successfully complete the loan. Upon signing the paperwork, be sure you understand what you are signing and take the time to ensure all the documents are accurate.

Lastly, closing fees are not due until the day you close. These are usually paid with a wire transfer. On a refinance, there are some fees that can be added to the loan balance, or the borrower can work with the lender to cover these fees (typically in exchange for a higher interest rate). Once the papers are signed, the down payment and fees are wired to the escrow officer, the keys to your new home will be handed to you and at last you can celebrate the beginning of a new chapter.

Have questions about the loan process? Connect with us to further discuss your specific situation. Our job is to make loans, not deny them. Happy house hunting!