How to Prepare Your Taxes When Buying a Home
TL;DR
Getting your taxes in order before buying a home can make the difference between a smooth approval and a stressful delay. Clean, accurate tax returns help lenders verify your income, strengthen your buying power, and keep your home purchase on track.
Why Taxes Are So Important When Buying a Home
Buying a home isn’t just about finding the right property it’s also about being financially ready. One of the first things lenders review is your tax history. Your tax returns help lenders confirm how much money you really earn and how stable your income is.
If your taxes are incomplete, filed late, or show large fluctuations, your loan approval could be delayed or reduced. Preparing your taxes ahead of time puts you in a stronger position as a buyer.
Step 1: File Your Taxes Correctly and On Time
Most lenders require your two most recent years of filed tax returns. If your taxes are not filed, your mortgage process may pause until they are completed.
To stay ahead:
File federal and state taxes on time
Avoid extensions when possible
Keep signed copies of all returns
Save W-2s, 1099s, and supporting schedules
Clear and consistent tax filings make the mortgage process much easier.
Step 2: Know How Tax Deductions Affect Your Buying Power
Tax deductions can lower what you owe but they can also lower the income lenders use to qualify you. This is especially important for self-employed buyers and 1099 earners.
Large write-offs for business expenses, depreciation, or mileage may reduce how much home you can afford on paper. Before filing, it’s smart to talk with your CPA if buying a home is part of your near-future plan.
Step 3: Understand How Lenders Review Different Income Types
Not all income is treated the same during underwriting:
W-2 employees: Income is based on salary and consistency
Self-employed buyers: Net income after deductions is key
Commission or bonus income: Usually averaged over two years
Rental income: Must be documented through tax returns
Knowing how your income is calculated helps you plan your purchase timeline with confidence.
Step 4: Avoid Major Tax or Income Changes Before Buying
Stability matters when buying a home. Major changes can raise red flags with lenders.
Try to avoid:
Changing jobs or becoming self-employed mid-process
Writing off unusually large expenses
Amending past tax returns during underwriting
Reporting sudden income losses
Keeping things steady helps your loan move forward smoothly.
Step 5: Organize Your Tax Documents Early
Having your documents ready reduces stress and speeds up approvals. Buyers should keep:
Two years of federal and state tax returns
W-2s, 1099s, and all schedules
Proof of any tax extensions
Your CPA or accountant’s contact information
Organization helps prevent last-minute delays.
Step 6: Coordinate With the Right Professionals
Buying a home is both a financial and real estate decision. Working with your lender, CPA, and real estate agent together ensures your tax strategy supports your homeownership goals.
This coordinated approach helps you buy smarter and with fewer surprises.
Frequently Asked Questions
Q: Why do tax returns matter so much when buying a home?
A: Tax returns show lenders your true income, stability, and ability to repay a mortgage.
Q: How many years of tax returns do I need to buy a home?
A: Most lenders require the most recent two years of filed tax returns.
Q: Can tax deductions reduce my loan approval amount?
A: Yes. Large deductions can lower the income lenders use to qualify you, especially if you’re self-employed.
Q: Should I speak with my CPA before buying a home?
A: Yes. A CPA can help align your tax strategy with your home-buying goals.
Q: What’s the best first step to prepare my taxes for home buying?
A: Make sure your taxes are filed, accurate, and consistent before starting the mortgage process.
By Alex Parmenidez, REALTOR® | Coldwell Banker Realty
Alex Parmenidez | Realtor® Licensed CT-MA-RI | Coldwell Banker Realty
196 Waterman St, Providence, RI 02906
C: (401) 426-4825 | O: (401) 351-2017
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