During 2015 FNMA had notified users in a few of the SEL’s about guideline clarifications on self employed borrowers that felt a bit like a seesaw. As you remember there was a big change announced early in 2015 that dramatically shifted the way we calculated income for borrowers who are self-employed using a partnership, LLC, or small corporation (using business tax forms 1065 & 1120S). The change was centered around comparing boxes 1,2, and 3 of your K-1 to the actual distribution amount on the K-1 and required the seller to use the lessor of the two. This resulted in a few turned down loans that just weeks before would have been approved on the “older” method but now did not make the cut.
25% Rule Qualifies More Borrowers
Within a few months of this change going into effect FNMA published clarifications again in an SEL and did slightly back off distributions versus income move announced a few months back. These clarifications (FNMA stated they were not changes just clarifications) to the income calculations were also accompanied with a newly redesigned 1084 cash flow form (dated 08/25/15). The good news during all these announcements FNMA has provided some information which may help a few more borrowers qualify!
If a borrower has less than 25% ownership in a business, the borrower is NOT required to remove any losses reported on the K-1, which means more income. This information is found on FNMA “Top Lender Questions” , which says “ for borrowers with business income reported on schedule K-1 and who own less than 25% of the business, the lender is not required to consider business loss in the evaluation of income” (Read B3-3.1-09).
Hopefully this “little” change could help a few more people to qualify for a mortgage. Over the years I have had to turn down a few applicants due to losses reported on schedule K-1’s for this exact scenario.