How to use FNMA 1084 and FHLMC Form 91 – Part 1

The cash flow forms such as the FNMA 1084 have been around for a very long time, with that being said if you do some research on mortgage industry thousands of people search every day looking for answers on how to use these forms.  As I have written in the past these forms are very limited to the type of borrowers they work for, and I believe the main reason they are confusing is because people try to use them in ways they are not designed to be used.

How to use the FNMA 1084

I receive many questions on our company email asking me to help explain the forms and how to get a borrower’s income correct using these forms.  I want to take the time with this blog post to lay out the best way to use the forms and get your borrowers income correct.

Rule One – Multiple Businesses & Income Sources

The first rule that will make working with these forms much easier. Do not try put multiple business’s or multiple income types on one form.  Although you can use each space on the FNMA 1084 and FHLMC Form 91 you can’t properly analyze the income trending by adding up all of the different types of income and getting “lump sums” at the end of each year.  FNMA/FHLMC require underwriter to evaluate if each income used is stable and will continue, so using lump sums at the end of each year is not going to be accurate.  If your borrower has three business’s, then create three cash flow forms to support the income.

Rule Two – SAM vs. AGI

The second rule is these forms are best used with SAM not the AGI method.  Some mortgage professional still use an older version of both forms and try to use AGI.  The AGI method can take up to three times as much math to complete.  All that extra math can be opportunities for errors and slower underwriting time.

These new forms are set up perfectly to use the SAM method.  To keep them straight SAM stands for Schedule Analysis Method, what that that means in English is this, only add income to the FNMA 1084 and FHLMC Form 91 what you are going to use.  AGI stands for Adjusted Gross Income method, this is where you put everything on the form to start and “subtract off” what you are not going to use, in my opinion the AGI method is a time waster and is much easier to make a mistake vs. SAM.

One more tip before we get started, we have built “fillable” forms for the FNMA 1084 and the FHLMC Form 91 at our website the will make it even easier to use these forms!  Go to www.blueprintio.wpengine.com and check under “calculators” for the forms.

Line by Line help FNMA 1084

The guide below is written as follows, the words in italics are directly from the instructions from the FNMA 1084.  The comments below the words in italics are my tips on how to interpret what the agencies stated in the instructions.

IRS Form 1040 – Individual Income Tax Return

W-2 Income from Self-Employment: Identify wages paid to the borrower from the borrower’s business. Self-employment wages may be confirmed by matching the Employer Identification Number (EIN) reported on the borrower’s W-2 with the EIN reported by the borrower’s business. When business tax returns are obtained, W-2 wages can be cross-referenced with compensation of officers reported on Form 1120S or Form 1120.

Tip – Only put the w-2 earned from the same business you are evaluating on this form

 

Schedule B – Interest and Ordinary Dividends

Line2a – Interest Income from Self-Employment: Identify interest income paid to the borrower from the borrower’s business. Review Schedule B, Part I and/or IRS Schedule K-1 or Form 1099-Int to confirm the payer is the same entity as the borrower’s business.

Line 2b – Dividends from Self-Employment: Identify dividend income paid to the borrower from the borrower’s business. Review Schedule B, Part II and/or IRS Schedule K-1 or Form 1099-Div to confirm the payer is the same entity as the borrower’s business.

Tip – If a borrower owns a business and paid themselves in a dividend you cannot give the borrower income in both SCH B and the business.  If you see the dividends and interest are coming from the business you are evaluating don’t add them here.

 

Schedule C – Profit or Loss from Business Sole Proprietorship

Line 3a – Net Profit or Loss: Record the net profit or (loss) reported on Schedule C.

Tip – This is found on line 31 of the schedule C

Line 3b – Nonrecurring Other (Income) Loss/ Expense: Other income reported on Schedule C represents income that is not directly related to business receipts. Deduct other income unless the income is determined to be recurring. If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

Tip – This item is found on line 6, if you see an income on this line you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if the income is ongoing no adjustment is needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 6.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 3c – Depletion: Add back the amount of the depletion deduction reported on Schedule C.

Tip – This is found on line 12

 

Line 3d – Depreciation: Add back the amount of the depreciation deduction reported on Schedule C. Vehicle depreciation included as part of the standard mileage deduction may be added back by multiplying the business miles driven by the depreciation factor for the respective year.

Tip – This is found on line 13 for normal depreciation.  The vehicle mileage can be found on line 44A, to get the depreciation that can be added back follow this formula.  Business miles listed on 44A x deprecation rate (2015 $0.24 / 2014 $0.22 / 2013 $0.23) = deprecation that can be added back on to income.

 

Line 3e – Non-deductible Meals and Entertainment Expenses: Deduct the portion of business-related meals and entertainment expenses that have been excluded for tax reporting purposes. These expenses, to the full extent they are incurred, are taken into account; therefore, the portion of these expenses that have been excluded must be identified and subtracted from business cash flow.

Tip – This is found on line 24B, this is a deduction not addition.

 

Line 3f – Business Use of Home: Add back the expenses deducted for the business use of home.

Tip – This is found on line 30

 

Line 3g – Amortization/Casualty Loss: Add back the expense deducted for amortization along with the expense associated with non-recurring casualty loss.

Tip – This is found on page 2 of the schedule C page 2 Part V

Schedule D – Capital Gains and Losses

Line 4a – Recurring Capital Gains: Identify the amount of recurring capital gains. Schedule D may report business capital gains passed through to the borrower on Schedule K-1 (IRS Form 1065 or IRS Form 1120S). Do not include business capital gains which are sporadic or result from a one-time transaction.

Note: Business capital losses identified on Schedule D do not have to be considered when calculating income or liabilities, even if the losses are recurring.

Tip – Capital gains are very hard to qualify for income on your borrower. If you use capital gains you will need to document that whatever capital gain activity completed can be repeated to earn the same amount of income for three years.  For example, if capital gains are from selling vintage muscle cars, you will have to document the borrower has a two year history of selling cars and has a reasonable inventory for cars on hand to earn the same profit for three years.  As I stated better off NOT to use this type of income.

Schedule E – Supplemental Income and Loss

Note: Use Fannie Mae Rental Income Worksheets (Form 1037 or Form 1038) to evaluate individual rental income (loss) reported on Schedule E. Refer to Selling Guide, B3-3.1-08, Rental Income, for additional details. Partnerships and S corporation income (loss) reported on Schedule E is addressed below.

Tip – The 08/25/15 1084 form finally dropped off rental income calculations that would never work as presented.  This was a nice upgrade

 

Line 5a – Royalties Received: Include royalty income which meets eligibility standards.

Tip – This is found on line 4 of the schedule E form

 

Line 5b – Total Expenses: Deduct the expenses related to royalty income used in qualifying the borrower.

Tip – This is found on line 20 of the schedule E form

 

Line 5c – Depletion: Add back the amount of the depletion deduction related to royalty income used in qualifying the borrower.

Tip – This is found on line 18 of the schedule E form

 

Schedule F – Profit or Loss from Farming

Line 6a – Net Farm Profit or (Loss): Record the net farm profit or (loss) reported on Schedule F.

Tip – Found on line 34 of the schedule F form

 

Line 6b – Non-taxable Portion of Ongoing Coop and CCC Payments: Certain federal agriculture program payments, coop distributions, and insurance/loan proceeds are not fully taxable. Add back the nontaxable portion of these income types provided these sources of income are likely to continue and do not represent a one-time occurrence.

Tip – Ongoing Coop is on the schedule F form line 3 to get the proper “add back” take the difference between Line 3A and 3B and add to totals if you can determine they are ongoing. To determine they are ongoing review two years tax returns to confirm they are there for two years and get a letter from the borrowers CPA or account to confirm they are expected to be ongoing.

Tip – Ongoing Coop is on the schedule F form line 5 to get the proper “add back” take the difference between Line 5A and 5B and add to totals if you can determine they are ongoing. To determine they are ongoing review two years’ tax returns to confirm they are there for two years and get a letter from the borrowers CPA or account to confirm they are expected to be ongoing.

 

Line 6c – Nonrecurring Other (Income) Loss: Other income reported on Schedule F represents income received by a farmer that was not obtained through farm operations. Deduct other income unless the income is determined to be recurring. If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

Tip – “Other income” this item is found on line 8, if you see an income on this line you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if it is on-going no adjustments are needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 8.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 6d – Depreciation: Add back the amount of the depreciation deduction reported on Schedule F.

Tip – Found on line 14 of the schedule F form

 

Line 6e – Amortization/Casualty Loss/Depletion: Add back the expense deducted for amortization/depletion along with the expense associated with non-recurring casualty loss.

Tip – This is found on line 32 but must be supported by the occupying statement.  If line 32 states “see statement 1” you must find statement 1 and confirm that the amount listed on line 32 is in fact Amortization/Casualty Loss

 

Line 6f – Business Use of Home: Add back the expenses deducted for the business use of home

Tip – Found on line 32 of the schedule F form, also make sure the home listed is NOT the subject as conventional loans cannot be done on properties with commercial farming
 

IRS Form 1065 – Partnership Income

Schedule K-1 Form 1065 – Partner’s Share of Income:

Line 7a – Ordinary Income (Loss): Record the amount of ordinary income (loss) reported to the borrower in Box 1 of Schedule K-1 (Form 1065).

Tip – This is found on the K-1 line 1 – NOTE this income must be supported by distributions or evidence the company was solvent and could have paid out the ordinary income, see FNMA guidelines on the proper solvency tests.

 

Line 7b – Net Rental Real Estate; Other Net Income (Loss): Record the amount of net rental real estate; other net income (loss) reported to the borrower in Box 2 and/or 3 of Schedule K-1 (Form 1065).

Tip – This is found on the K-1 line 2 & 3 – NOTE this income must be supported by distributions or evidence the company was solvent and could have paid out the rental income, see FNMA guidelines on the proper solvency tests.

 

Line 7c – Guaranteed Payments to Partner: Add guaranteed payments to partner when the borrower has a two-year history of receipt.

Tip – This income is found on K-1 Line 4.  This income does not need to be supported by distributions and if the borrower is 25% or greater owner insure borrower has 2-year history.

 

Adjustments to Business Cash Flow – Form 1065

When business tax returns are obtained by the lender, the following adjustments to business cash flow should be made.

Line 8a – Ordinary income (loss) from other Partnerships: In order to consider ordinary income from other partnerships, the lender must obtain additional documentation to confirm the income passed through from the other partnership to the borrower’s business meets partnership income eligibility standards. Deduct ordinary income passed through to the borrower’s business from other partnerships unless this additional action is taken. Losses passed through to the borrower’s business may be added back when the lender determines pass-through losses are not likely to continue.

Tip – “Ordinary income / loss” this item is found on line 4, if you see an income on this line you must prove that the business has been receiving other partnership income for two years and will be continued to be received. This can be done by getting the tax returns from the “other” partnership that the business owns and confirm that business is stable and solvent, if the “other business” is stable and solvent then no adjustment needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 4.

 

Line 8b – Nonrecurring Other (Income) Loss: Other income reported on Form 1065 generally represents income that is not directly related to business receipts. Deduct other income unless the income is determined to be recurring. If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

Tip – “Other income” this item is found on line 5,6, and 7 if you see an income on these lines you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if it is on-going no adjustments are needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in lines 5,6, and 7.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 8c – Depreciation: Add back the amount of the depreciation deduction reported on Form 1065 and/or on Form 8825.

Tip – This is found on line 16c of the 1065 and on the 8825 line 14

 

Line 8d – Depletion: Add back the amount of the depletion deduction reported on Form 1065.

Tip – This is found on line 17

 

Line 8e – Amortization/Casualty Loss: Add back the expense deducted for amortization/depletion along with the expense associated with non-recurring casualty loss.

Tip – This is found on line 20 but must be supported by the occupying statement.  If line 20 states “see statement 1” you must find statement 1 and confirm that the amount listed on line 20 is in fact Amortization/Casualty Loss

 

Line 8f – Mortgage or Notes Payable in Less than 1 Year: Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1120S, end of year column. This deduction is not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.

Tip – This is found on schedule L line 16D, to avoid deducting from the income confirm if the company has enough cash listed on line 2bD.  If line 2bD does not show enough cash have the borrowers account or CPA confirm that the debts listed in line 16D can be rolled over and are NOT due and payable in the tax year.  If these two methods do not work, you must deduct this line from the borrower’s income.  A common mistake is people will deduct the amount listed on line 16D from the most recent year AND the previous year.  This is the same debt, do not deduct it from the previous year.

 

Line 8g – Non-deductible Travel and Entertainment Expenses: Deduct the portion of business-related expenses (travel, meals, and entertainment) reported on Schedule M-1 of Form 1065 that have been excluded for tax reporting purposes. These expenses, to the full extent they are incurred, are taken into account; therefore, the portion of these expenses that have been excluded must be identified and subtracted from business cash flow.

Tip – Found on line Schedule M-1 4B

 

Line 8h – Subtotal: Total lines 8a – 8g. Line 8i – Form 1065 Total: To arrive at the borrower’s proportionate share of adjustments to business cash flow, multiply the subtotal (line 8h) by the borrower’s percentage of ownership (the borrower’s ending percentage of capital ownership as reported on the Schedule K-1 (Form 1065)).

 

IRS Form 1120S – S Corporation Earnings

Schedule K-1 Form 1120S –Shareholder’s Share of Income

Line 9a – Ordinary Income (Loss): Record the amount of ordinary income (loss) reported to the borrower in Box 1 of Schedule K-1 (Form 1120S).

Tip – This is found on the K-1 line 1 – NOTE this income must be supported by distributions or evidence the company was solvent and could have paid out the ordinary income, see FNMA guidelines on the proper solvency tests.

 

Line 9b – Net Rental Real Estate; Other Net Income (Loss): Record the amount of net rental real estate; other net income (loss) reported to the borrower in Box 2 and/or 3 of Schedule K-1 (Form 1120S).

Tip – This is found on the K-1 line 2 & 3 – NOTE this income must be supported by distributions or evidence the company was solvent and could have paid out the ordinary income, see FNMA guidelines on the proper solvency tests.

 

Adjustments to Business Cash Flow – Form 1120S

When business tax returns are obtained by the lender, the following adjustments to business cash flow should be made.

Line 10a – Nonrecurring Other (Income) Loss: Other income reported on Form 1120S generally represents income that is not directly related to business receipts. Deduct other income unless the income is determined to be recurring. If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

Tip – “Other income” this item is found on line 4 and 5 if you see an income on these lines you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if it is on-going no adjustments are needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 4 and 5.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 10b – Depreciation: Add back the amount of the depreciation deduction reported on Form 1120S and/or or Form 8825.

Tip – This is found on line 14 of the 1120S and on the 8825 line 14

Line 10c – Depletion: Add back the amount of the depletion deduction reported on Form 1120S.

Tip – This is found on line 15

Line 10d – Amortization/Casualty Loss: Add back the expense deducted for amortization/depletion along with the expense associated with non-recurring casualty loss.

Tip – This is found on line 20 but must be supported by the occupying statement.  If line 20 states “see statement 1” you must find statement 1 and confirm that the amount listed on line 20 is in fact Amortization/Casualty Loss

 

Line 10e – Mortgage or Notes Payable in Less than 1 Year: Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1120S, end of year column. This deduction is not required for lines of credit or if there is evidence that these obligations rollover regularly and/or the business has sufficient liquid assets to cover them.

Tip – This is found on schedule L line 17D, to avoid deducting from the income confirm if the company has enough cash listed on line 2bD.  If line 2bD does not show enough cash have the borrowers account or CPA confirm that the debts listed in line 17D can be rolled over and are NOT due and payable in the tax year.  If these two methods do not work, you must deduct this line from the borrower’s income.  A common mistake is people will deduct the amount listed on line 17D from the most recent year AND the previous year.  This is the same debt, do not deduct it from the previous year.

 

Line 10f – Non-deductible Travel and Entertainment Expenses: Deduct the portion of business-related expenses (travel, meals, and entertainment) reported on Schedule M-1 of Form 1120S that have been excluded for tax reporting purposes. These expenses, to the full extent they are incurred, are taken into account; therefore, the portion of these expenses that have been excluded must be identified and subtracted from business cash flow.

Tip – Found on line Schedule M-1 4B

Line 10g – Subtotal: Total lines 10a – 10f. Line 10h – Form 1120S Total: To arrive at the borrower’s proportionate share of adjustments to business cash flow, multiply the subtotal (line 10g) by the borrower’s percentage of stock for tax year reported on the Schedule K-1 (Form 1120S)

 

IRS Form 1120 – Regular Corporation

When business tax returns are obtained by the lender, the following adjustments to business cash flow should be made.

Line 11a – Taxable Income: Record the taxable income reported by the business on the first page of Form 1120.

Tip – Found on line 30

 

Line 11b – Total Tax: Deduct the corporation‘s tax liability identified on page 1 of Form 1120.

Tip – Found on line 31

 

Line 11c – Nonrecurring Other (Gains) Losses: Deduct gains unless it is determined that the gains are likely to continue. Losses may be added back when it can be determined that the loss is a one-time occurrence and is not likely to continue.

Tip – “Other income” these items are found on line 8 and 9 if you see an income on these lines you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if it is on-going no adjustments are needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 8 and 9.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 11d – Nonrecurring Other (Income) Loss: Other income reported on Form 1120 generally represents income that is not directly related to business receipts. Deduct other income unless the income is determined to be recurring. If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

Tip – “Other income” this item is found on line 10 if you see an income on this line you must prove that the business has been receiving it for two years and will be continued to be received.  This can be done by getting a letter from the company CPA or accountant confirming the on-going income, if it is on-going no adjustments are needed. If the income is NOT on-going you must reduce the borrower’s income by the amount in line 10.  If a loss is listed here the loss can be added back if you can document that it will not be on-going, again ask the borrowers CPA or accountant to confirm the loss.

 

Line 11e – Depreciation: Add back the amount of the depreciation deduction reported on Form 1120.

Tip – Found on line 20

 

Line 11f – Depletion: Add back the amount of the depletion deduction reported on Form 1120.

Tip – Found on line 21

 

Line 11g – Amortization/Casualty Loss: Add back the expense deducted for amortization/depletion along with the expense associated with non-recurring casualty loss.

Tip – This is found on line 26 but must be supported by the occupying statement.  If line 26 states “see statement 1” you must find statement 1 and confirm that the amount listed on line 26 is in fact Amortization/Casualty Loss

 

Line 11h – Net Operating Loss and Special Deductions: Add back the full amount of the deduction related to net operating loss and/or special deductions.

Tip – Found on line 29c

 

Line 11i – Mortgage or Notes Payable in Less than 1 Year: Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1120, end of year column. This deduction is not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.

Tip – This is found on schedule L line 17D, to avoid deducting from the income confirm if the company has enough cash listed on line 2bD.  If line 2bD does not show enough cash have the borrowers account or CPA confirm that the debts listed in line 17D can be rolled over and are NOT due and payable in the tax year.  If these two methods do not work, you must deduct this line from the borrower’s income.  A common mistake is people will deduct the amount listed on line 17D from the most recent year AND the previous year.  This is the same debt, do not deduct it from the previous year.

 

Line 11j – Non-deductible Travel and Entertainment Expenses: Deduct the portion of business-related expenses (travel, meals, and entertainment) reported on Schedule M-1 of Form 1120 that have been excluded for tax reporting purposes. These expenses, to the full extent they are incurred, are taken into account; therefore, the portion of these expenses that have been excluded must be identified and subtracted from business cash flow.

Tip – Found on line Schedule M-1 5C

 

Line 11k – Subtotal: Total lines 11a – 11j.

Line 11l – Dividends Paid to Borrower: Dividends paid to stockholders are reported on Schedule M-2 of Form 1120. The borrower’s share of these distributions will be reported on Schedule B of Form 1040. These funds are also included in the corporation’s taxable income and are therefore being double-counted. Therefore, subtract distributions paid by the corporation and reported on the borrower’s Schedule B.

Tip – As mentioned on line 4A do not count this income under the borrowers Dividend or Interest section, it is best to leave the income her.

 

Line 11m – Form 1120 Total: Subtract 11l from 11k to determine the adjustments to business tax flow that may be considered when the borrower(s) own 100% of the corporation and the business has adequate liquidity to support the withdrawal of earnings.

 

Additional Resources

This wraps up part 1 on the FNMA 1084.  As you can see there are some tips and tricks in learning how to get the most out of the FNMA 1084 form.  There are additional resources available to help you in your underwriting journey.

• Automatic FNMA Form 1084 creation software

Look for more information in my next post.   I will give tips to all the lines of instructions on the Form 91.