I just read an interesting article on the Freddie Mac site from MBO Partners, it was called “The State of Independence In America”. The findings of this article show that Americans who are independent contractors have grown 4.4% in 2018 total a total of 42 Million adult workers. With that much of the work force involved in this new economy I think we need to sharpen our skills on supporting this new type of borrower.
Some would think that this group of independents means just fully self employed workers or in other words an all-or-nothing business owner, but the article outlines that there are three major groups of independents.
- Full Time (Over 15 hours per week)
- Part- Time (Under 15 hours per week)
- Occasional (irregularly or sporadically)
The information provided shows that in today’s economy we are a “side gig nation”. I think this has been grown by great platforms that help us have our side gig and still maintain our main source of income. A few examples I can think of off hand are Uber, Etsy, Ebay, Multi Level Marketing , Fiverr, and Upwork.
So what if our borrower has a side gig, gets K-1 income but is under 25% owner?
Good news is Fannie Mae guidelines do a great job explaining their acceptance of that form income found in the Other Income section of the guidelines ( B3-3.1 “Employment and Other Sources of Income)
For borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC), ordinary income, net rental real estate income, and other net rental income reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 may be used in qualifying the borrower provided the lender can confirm the business has adequate liquidity to support the withdrawal of earnings
Pro Tip: make sure you are following the same rules to confirm the distribution of that K-1 income (lines 1,2, and 3) as you would for a borrower with over 25% income.
For Freddie Mac they don’t offer the same direct guidance stating K-1 income sources under 25% is acceptable. However they do provide this guidance which leads me to say that it is acceptable income as long as it meets the same standards that Fannie Mae offers.
FHLMC Allregs 5301.1 section B
Regardless of the underwriting path, the income qualification sources used to qualify the Borrower (whether or not specifically addressed in Topic 5300) and the documentation in the Mortgage file must be evaluated for stable monthly income qualification requirements and must meet the requirements of Topic 5300. Income qualification sources that do not meet these requirements or are not calculated correctly may invalidate the Loan Product Advisor Risk Class on the Feedback Certificate.The Seller must include a written analysis of the income qualification sources and amount in the Mortgage file. In addition, all documentation used to establish a stable monthly income must be retained in the Mortgage file.
As our economy evolves, we need to keep evolving to understanding how our clients earn income. Even if it means multiple sources. As long as we stick to the four requirements of all income (Stable , 3 years reasonable continuance , a history of receipt, and proper documentation) I don’t see any reason to shy away from using this income to qualify borrowers!
Welcome to the “side gig” economy!
What about the opposite problem!?! Here is the beginning scenarios: Husband is purchasing only in his name. His qualifying income is W-2 income from Company A. The documentation needed according to DU is W-2s only. He makes ~9k/month. Shortly before closing he makes a 53k deposit that includes several payments to the wife from the wife’s company that she owns and 2 payments to him for ~18k each from the company he receives W-2 income from. Would you have asked for documentation on why the company deposited those funds now?
I requested an LOX from the company for deposits. I got major pushback from the LO. I was told I didn’t need it because it showed on his tax return that he owns a portion of the company and his tax returns prove that he receives annually ~$100,000 outside of W-2 income from this company. I then requested the Tax Return and got pushback because DU said they weren’t needed. I believe I either needed an LOX from company stating why the distribution OR the tax returns showing non W-2 income from this company. If tax returns are used to verify history of this type of deposit, it must include K-1s showing the percentage of ownership, correct? I must do that to prove he owns less than 25% of ANY company, right?
If I receive K-1s and he owns more than 1 company, (ended up there were 3 companies on the tax returns between him and his wife) I have to verify he owns less than 25% of ANY company? If he owns more than 25% of ANY company we must calculate income using ALL profits and losses from ALL companies he is part owner of regardless of percentages of ownership or if I am not using the income for qualification purposes?
I am new to the underwriting game and do not have another underwriter on staff. I am having a hard time digging my heels in and standing my ground because I am not 100% confident in my interpretation. I have been through underwriting classes. Would your training program be able to help me solidify those skills or take them to the next level? How often do you update content? (Everything changes so frequently and the UW trainings I recently completed hadn’t been updated since 2016.) Would these trainings be good to help LOs be better at having cleaner files before submitting or would it be too much technical information for them? If I paid for the year of training access, could I send scenario questions like the above to verify my decision on the tricky ones? If not, do you recommend another resource for that?
I look forward to your response and thank you in advance for your assistance!
Hi Crystal
Let me start with your last questions and then help you with your scenario. Being new to the game it is important you have a “mentor system” set up, this system needs to have the following 1) A source of training 2) A place where you can actually underwrite a file (or in other words hands-on training) 3) A mentor who can review your work and confirm it is accurate (or an audit) 4) The ability to improve/correct the process. With my training, you can get the education, and I do have a number that my clients can call into me and we can go over a scenario like this. The UnderWriting field guide (www.uwfieldguide.com) is kept up to date, we have monthly webinars to go over new information and give lessons each month.
As far as the scenario you have.
1) When you state “w-2 income” that does define what type of income source your borrower has. Self Employed borrowers also get W-2’s… so I will make the assumption the borrower is SE..see my next point
2) You stated the borrower got $53,000 deposit… I am a bit confused on the wording.. “53k deposit that includes several payments to the wife from the wife’s company that she owns and 2 payments to him for ~18k each from the company he receives W-2 income from” So my answer here I would need to talk to you.. but what I think this shows is the borrower is self employed…or at a minimum employed by a family member which both require 2 years of taxes
3) When you mentioned “show on the tax returns” I am assuming you meant SCH E…. if you have income on the SCH E you will need the K-1 that sources the income. What the SCH E does NOT show is who the K-1 is for when you have two borrowers… so yes you were right to ask for at a minimum the k-1 ot confirm % of ownership
4) Getting the K-1’s would tell you the ownership %…so that would answer if you need business returns for hte K-1… if the K-1 says 25% or greater biz returns may be needed, if less than 25% will NOT be needed
This forum is probably not the best to help you with this question… so feel free to reach out directly to me.. you can find me on linked in or go to our company page to the contact us section (www.blueprintio.wpengine.com) and we can hook up and assist.