How To Prepare for Tax Season To Buy a House Next Year

If you’re dreaming of owning a home in Massachusetts by 2024 or 2025, the path to realizing that dream begins right now. 

Getting your taxes in order is an essential task, particularly for self-employed individuals or those earning in cash. Why? Because declaring the highest possible net income is a strategic move that can make all the difference. This guide is here to guide you in your path to homeownership, taking you through each step with care and clarity.

So, if your goal is to buy a house next year, you need to think smartly about money and taxes. But don’t worry; you’re not alone in this. We’ll explore why and how tax preparation is a crucial step in your home-buying journey. Additionally, we’ll delve into getting your taxes just right, as lenders will closely examine your tax records from the last two years when you apply for a loan. 

This guide will also cover how to present your income attractively on paper, manage any debts, and save diligently for that all-important down payment. Moreover, we’ll take a dive into the Massachusetts housing market, ensuring you feel ready and confident as you step into this new accomplishment.

So, let’s get started. Think of this guide as your friendly companion, guiding you through every important detail. By the end of it, you’ll be well-prepared and excited to embark on your homeownership journey in 2024 or 2025.

A Strategic Guide to Tax Preparation for Those Who Want to Buy a House Next Year in Massachusetts

1. Maximizing Net Income on Tax Returns

Begin by understanding net income– the amount you earn after all deductions and expenses. This figure is what lenders scrutinize when assessing your mortgage application.

• The Lender’s Perspective

Mortgage lenders look closely at your net income to determine your borrowing capacity. The higher your net income, the more favorable your loan terms could be.

Mortgage lenders favor applicants who show consistency in their earnings. If there are any irregularities or fluctuations in your income, prepare a clear explanation, perhaps backed by a letter from your employer or clients.

• Strategic Declaring of Income and Expenses 

If you’re self-employed or earning in cash, it’s important to declare a realistic yet maximized net income. This means being strategic about the expenses you declare. Remember, every dollar declared as an expense is a dollar that can’t be counted toward your mortgage eligibility.

2. The Importance of Accurate and Complete Tax Filings

• Two Years of Tax Records 

Lenders typically review the last two years of tax returns. If you’re planning to buy a house in 2024, your 2022 and 2023 tax filings will be under scrutiny. Same if you plan to buy in 2025, your taxes from 2023 and 2024 will be reviewed.

• Transparency and Compliance 

Ensuring your tax filings are accurate and complete is crucial. Any discrepancies or incomplete information can raise red flags for lenders and potentially delay your mortgage application.

• Role of Professional Help

Navigating the intricacies of tax law and its implications on your home-buying process is no small task, especially if you have a complex income structure. We strongly encourage you to engage with a tax professional. 

A qualified tax expert not only brings clarity to your unique financial situation but also helps ensure that your tax filings are precise and advantageous for your home purchase plan. They can provide invaluable insights on maximizing your net income while staying within legal boundaries, tailoring their advice to align with your homeownership goals in Massachusetts. 

Remember, in matters as significant as buying a home, the expertise of a tax professional can be a crucial asset in guiding you toward making informed and beneficial financial decisions.

3. Managing Debt

• Avoid Payment Plans with the IRS

If possible, avoid entering into payment plans with the IRS. Some housing loans may be inaccessible if you have outstanding IRS debt, and this also reduces your overall debt capacity.

• Debt Reduction Strategies

Create a plan to reduce your debts, focusing on high-interest debts first. Consider debt consolidation if you have multiple high-interest loans or credit card balances.

• Planning for Tax Payments

One of the main reasons to prepare for tax season if you want to buy a house is related to this specific point. Start planning now if you expect to owe a significant amount in taxes. Set aside funds or explore payment strategies to ensure you can clear your tax liability in full.

4. Building a Strong Financial Profile

• Improving Credit Score and Reducing Debts

In addition to preparing your taxes, focus on improving your credit score and reducing any existing debts. This strengthens your overall financial profile and can improve your mortgage terms. Make sure you make all the payments on time!

With that being said, we recommend you avoid acquiring any new debts. For example, do not buy a new car if you’re planning to buy a house. Also, do not apply for new credit cards because they will reduce your credit score. Instead, we suggest you ask your bank to increase the credit limit of your existing credit cards.

[Related Article: How to Buy a House in Massachusetts with Bad Credit]

• Saving for Down Payment and Closing Costs

Create a detailed savings plan for your down payment and closing costs. This should include a monthly savings goal, strategies to reduce expenses, and perhaps even ways to increase income, such as taking on additional work. The larger your down payment, the less you’ll need to finance, which can make your mortgage application more attractive.

→ Our Recommended Home Savings Strategy

Once you know your total monthly costs, aim to maintain a balance in your account that is three times this amount. For instance, if your monthly expenses total $1,500, strive to keep at least $4,500 in your account. Practice this for 3 to 6 months. This approach not only ensures you have a cushion for emergencies but also helps you develop disciplined savings habits. After establishing this routine, begin allocating a specific percentage of your income towards saving for the down payment and closing costs of your house. This strategy accelerates your savings process, bringing you closer to your goal more quickly than you might expect.

In addition to saving for your down payment, don’t forget to set aside funds for closing costs, which can include loan origination fees, title insurance, appraisals, and more. These costs can add up, so it’s important to factor them into your overall savings plan.

[Related Article: How to save for a house: The home savings tips you should know]

5. Navigating the Mortgage Pre-approval Process in Massachusetts

Getting pre-approved is the first step once you get your finances in check. Before you even go house-hunting, you should get pre-approved. This is the only way to know how much you can actually afford. Therefore, you can find appropriate houses to fit your budget!

• Thorough Financial Documentation

Compile an extensive set of financial documents. This should include not just the last two years of tax returns and recent pay stubs but also a comprehensive list of assets, debts, and monthly expenses.

• Choosing the Right Mortgage Lender

Research various mortgage lenders in Massachusetts. Consider both large national banks and local credit unions, as they may offer different rates and terms. Look for lenders who have a deep understanding of the local market and can provide insights into the Massachusetts-specific lending process.

[Related Article: Mortgage Application Process: Step by Step]

6. Grasping the Massachusetts Real Estate Market

Dive deep into the real estate market of the specific area in Massachusetts where you plan to buy. This includes understanding the trends in house prices, the typical length of time houses stay on the market, and the level of competition among buyers. A real estate agent can guide you in this process.

• Homebuyer Assistance Programs

Massachusetts offers various programs to assist homebuyers, especially first-timers. These can include down payment assistance, subsidized interest rates, or tax credits. 

For example, FHA loans typically require a down payment of 3.5%, and Conventional loans usually require a 5%. Both come with their benefits!

If you’d like to learn more about these programs to understand which ones you might qualify for, click HERE.

Conclusion

Your journey to homeownership in Massachusetts starts with strategic tax preparation today. By focusing on maximizing your net income, ensuring accurate tax filings, managing debts wisely, and building a strong financial profile, you’re laying the groundwork for a successful mortgage application. 

This process requires diligence and foresight, but the reward is a home of your own in one of the most beautiful states. 

Start planning now to make your dream a reality in 2024 or 2025.

If you need help with your taxes, especially for buying a house, we highly recommend you talk to Paola Recinos. She knows a lot about taxes and can really help you out! You can get in touch with her by clicking here.

But if you’re ready to start looking for your dream house, you can contact me by clicking here or calling (617)230-1486.

Remember, if you want to accomplish your homeownership dream, it all starts with taking the necessary steps. You could do it alone, or we could guide you every step of the way!