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How Do Unreimbursed Business Expenses Affect USDA Loan Qualifying?

April 25th, 2014 by Sean Stephens

How do 2106 Expenses Impact USDA Loan Qualifying? 

Commonly known as a 2106 expense, due to the associated IRS tax form, this is a frequent question and one that can have a major impact on the USDA loan qualifying process.

Before we get started, today’s topic relates strictly to the mortgage qualifying process and not about tax advice.  If you have any questions about eligible deductions, please consult your tax professional.

USDA Guidelines on Unreimbursed Employee Business Expenses

So what is an unreimbursed employee business expense?

Per the IRS:  Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are:

  • Paid or incurred during your tax year,
  • For carrying on your trade or business of being an employee, and
  • Ordinary and necessary.

“An expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. An expense does not have to be required to be considered necessary.”

Unreimbursed business expenses affect USDA loan qualifying in two different ways.

  • First off, depending on the type of expense claimed for the deduction, it can reduce the income calculated for loan qualifying, otherwise known as repayment income, thus lowering the eligible loan size or sales price a homebuyer can qualify for. 
  • However, in the case of a USDA loan, we also have to consider county income limit calculations.

These same 2106 expenses can also be deducted from that, to help reduce the annual income calculation.

I know it sounds complicated so let’s review the following example to help illustrate:

  • The potential homebuyer claimed $6,000 in unreimbursed business expenses related to uniforms, meals, travel, and education that were all work related.
  • Pay Stubs & W2 forms in the file support a salary of $80,000 per year, which was also their annual income
  • The USDA income limit for their household size is $74,750.
  • The unreimbursed business expenses are reviewed and then DEDUCTED from the income used to qualify for the loan, but
  • Also deducted from the annual income, bringing this income calculation back in line and now eligible!
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