I would bet at one time or another you have Googled Freddie Mac Form 91 and gave it a try. The purpose of this form is to create a uniform way to evaluate self-employed income and other forms of income for your borrower outside of employment income.
The form gives you an acceptable format to complete an income evaluation of your typical self-employed borrower. However, if you don’t evaluate self-employed income on a regular basis, then the form can be a bit tricky. Here are three common errors you can avoid.
Multiple businesses with the same tax form type
For example, if you have a borrower who owns more than one partnership (using IRS Form 1065) then Form 91 will get noisy very quickly. The issue here is that if you have two 1065 forms, how do you audit / describe the amount of the depreciation entered on Form 91? If each business has deprecation it would be nearly impossible to record the amount on Form 91 and make it transparent to the auditor what the correct number is. For example, if the depreciation line item says $1,000 how would you know which business that was from? Or was it split between the two businesses?
My advice here: create one Form 91 for every business. This keeps the information clear and allows you to do the proper trending analysis to boot.
Missing self-employed guideline
When you review the Form 91 there are some very noticeable lines missing especially on the 1065 and 1120S section of the form. The big one is distributions. In AllRegs section 5304.1 the underwriter is required to confirm the solvency with either distributions or using a solvency test, neither of which are on the Form 91.
To avoid this mistake, keep in mind Form 91 is just a formatted worksheet. It is not intended to approve self-employed income. Be sure to read your guidelines and follow the three key steps we teach to confirm determine IF the income is eligible to qualify the borrower. These lessons are discussed in our training program the “10 point underwriting process“. We also had a video blog covering eligible income.
Using Form 91 for rental income
This is the classic “square peg in a round hole” problem. The Form 91 is not designed to determine rental income on one or more rental properties. Nothing more in depth here, just don’t do it!
The correct document is to use Freddie Mac Form 92. This form is a rental income calculator that can handle up to 6 properties on this one worksheet. You can find a copy here FORM 92
Just like any other tool, Form 91 is an effective worksheet IF you know how to use it and avoid the common errors we just listed. If you have questions on how to use the form, please feel free to email us and we can help! The best way to reach us is at firstname.lastname@example.org
Until we meet again in next weeks blog, keep in mind… “A true mortgage professional is always learning!”