Due to the change in the tax code for 2018 both Fannie Mae and Freddie Mac have eliminated the need to consider Unreimbursed Business Expenses when evaluating borrower income. See FNMA SEL 2018-09 and FHLMC Guidelines for additional information. As of 05/20/2019, the government guidelines have not been updated, but since the tax forms do not have this information for 2018 and going forward my opinion is these should not be considered for any loan.
2106 Expenses Overview
Although it has been almost a year since FNMA published more definitive guidelines on when to subtract unreimbursed business expenses (lovingly known as 2106 expenses or URBE’s in the industry), the topic of “To deduct or not to deduct” is still a top question. I can tell you personally when I am underwriting a loan I still feel the urge to deduct the amount regardless of income type. This habit is from years and years of working at investors who required us to reduce the income from borrowers and always explained as “taking the safest route”. Well, I hope this blog will help you kick the habit of considering theses expenses for every borrower by providing the exact wording and guideline references to help ease out of the habit.
2106 Expenses with FNMA
Updated 12/04/2018 Fannie Mae in SEL 2018 -09 removed the requirement for adjusting a borrowers income due to URBE’s
June 30th 2105 FNMA SEL 2015-07 made it clear the only time you need to remove the 2106 expense is when you have a borrower that is qualifying with 25% or more of his or her income that is commission. For example, if your borrower has a base salary of $2,000 per month and commission income of $1,000 per month, your commissions exceed the 25% threshold so you would be required to remove the monthly average of the 2106 expenses. Here is the guidance: FNMA B3-3.2.1-03
2106 Expenses with FHLMC
FHLMC just recently launched a new and improved version of AllRegs so the date of the rule looks new but it really is not, the recent update date on the page is just referencing the new format, not a new rule. Per Allregs 5303.4 dated 03/02/16 the only time you find employee paid business expenses is under commission as follows: The Borrower must have a two-year consecutive history of receiving commission income and the commission income must be likely to continue for at least the next three years in order to consider the income for qualifying. Borrowers who receive commission income must provide federal tax returns for the previous two-year period. Employee paid business expenses reflected on the Borrower’s tax returns must be deducted from the Borrower’s gross commission income when calculating income.
Guidelines are tough and there are a lot of moving pieces in addition to the math required to get the right income. We are constantly updating Uberwriter with the most recent guidelines to keep you on track. Check out Uberwriter, it can help you with the math and the guidelines, all for less than the price of one cup of coffee per month! Quitting old habits is hard, but in this case, it is the right thing to do.
7 responses to “How and when to deduct 2106 expenses”
Great info. Thank you
After I originally commented I seem to have clicked the -Notify me when new
comments are added- checkbox and from now on every
time a comment is added I recieve 4 emails with the same comment.
Perhaps there is an easy method you are able to remove me from that service?
Thank you! Felicia
I have been reviewing the setting on the website I can’t find where you are getting so many comments, so I apoligize that you are getting four copies of the same information! I hate to say this but the best fix i can think of is to put a few of them on the “spam” folder on your computer. Again really sorry!
I have a borrower who has been at his current position for less than two years. His income is 100% commission. Do I average the business expense from the previous 24 months in this case? Or only from the current employment?
All i can do is offer my best advice and this call will be up to your underwriter. Since URE are only shown on tax returns you won’t have any accurate way to measure during the current time OR figure out how much on the 2016 tax return is for the old and how much is for the new. So the method i would follow would be anyalize 2016 vs 2015 and take the worse case number to remove from income.
Hello: I have an FHA loan where my borrower is a Union worker for the last 2 years and a self-employee for a side business. Due to his self employee income I have to show his tax returns for the last 2 years, the same are showing unreimbursed business expenses, so this means that his union wages are commission wages and therefore the UBE should be deducted from his income? I’m calculating his union income by averaging his last 2 years W-2’s and current assignment YTD. Thank you
FHA requires the deduction of URBE noted, FHA requires it all the time where conventional only requires it where the borrower is using 25% or more of their income to qualify.