How to use FNMA 1084 and FHLMC Form 91 – Part 2

05/20/2019 Update

We are updating our post on how to use the Form 91 from FHLMC.  To confirm you are using the correct Form 91 form be sure that you are using the Form 91 dated 05/01/2019 which can be found here !

The cash flow forms such as the FHLMC Form 91 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 that people try to use them in ways they are not designed to be used.

How to use the FHLMC Form 91

Freddie Mac Form 91 is back on the “top question” list again!  Questions like does this form use a SAM or AGI method?  What happens if we have three schedule C business to evaluate? The instructions provided don’t really give you answers to many of the common issues and that is what prompts our clients and followers to “ask the underwriter” what our opinion to use this form.  We will break this blog into two weeks, the first week we will review section 1, and the second week sections two through five (which is the business income section.

Line 1- W-2 income:
If evaluating a self-employed Borrower, only include the W-2 income from self-employment on this line. W-2 income from other sources should be evaluated separately

Tip- Only put the w-2 earned from the same business you are evaluating on this form, you should have ONE Form 91 per business type.

Line 2 – Interest and Ordinary Income:
The Form 91 instructions don’t dig down to the common question on this type of income.  FHLMC Allregs requires the seller to confirm two years of receipt AND that the asset producing this income is still at the same level that produced the income.  Make sure you read all the details in FHLMC Allregs Section 5305.2 and the IRS tax form you can find these on is SCH B

 

Line 3- Schedule C income:
Include continuing income or loss from a commission or sole proprietorship in this area. The instructions don’t give you a “line by line” on schedule C (or any SE borrower) so I have provided the lines required to fill out the form correctly. The current Form 91 has two different sections for Schedule C which is very helpful, but both boxes are filled out the same.

Net Profit or Loss:
Line 31 of the schedule C

Nonrecurring Other (Income) Loss/ Expense:
Line 6 of the schedule C, 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.

Depletion:
Line 12 of the schedule C

Depreciation:
Line 13 of the schedule C.  The second spot you can find depreciation is on line 44A and use the depreciation amount built into the standard mileage deduction. To determine that depreciation that can be added back follow this formula.  Business miles listed on 44A x deprecation rate (2017 $0.25 / 2016 $0.24 / 2015 $0.24) = deprecation that can be added back on to income.

Meals and Entertainment Exclusion
Line 24B of the schedule C this is a deduction, not addition.

Business Use of Home:
Line 30 of the schedule C

Amortization/Casualty Loss:
Line 27 of the Schedule C is where the number is located but you must confirm what the source is for the line 27 by looking at page 2 of the schedule C page 2 Part V

Capital Gains and Losses
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 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.

This income is found on Schedule D of the borrowers 1040 tax returns.

Schedule E Supplemental Income or Loss Royalties:
On the old form 91 this section used to include working on self-employed borrowers who owned 1065 and 1120S business.  In addition, it required you to evaluate rental income here as well.  One of the best changes to this Form 91 is the removal of evaluating all these different forms of income in one section.

 

 

Schedule F- Profit or loss from Farming
Include continuing income or loss from the farming activity in this area. The instructions don’t give you a “line by line” on schedule F (or any SE borrower as I mentioned in the schedule C section) so I have provided the lines required to fill out the form correctly.

Net Farm Profit or (Loss)
Line 34 of the schedule F

 

 

 Non-taxable Portion of Ongoing Coop and CCC Payments:
Line 3A and 5A of the schedule F.  If an income is recorded 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 ongoing income.

Nonrecurring Other (Income) Loss
Line 8 of the schedule F .  If income recorded 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.

Depreciation:
Line 14 of the schedule F

Amortization/Casualty Loss/Depletion:
Line 32 of the schedule F but must be supported a supplemental 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

Business Use of Home:
Line 32 of the schedule F but must be supported a supplemental 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 business use of a home.  The seller must also confirm the property listed as the “Farm” is NOT the subject most loans do not allow properties with commercial farming

Continuing on with the self-employed sections of the form.  This is where just relying on the form will result in approving income that does not meet guidelines.  Keep in mind Form 91 is one of the tools you must use to determine any income properly but is especially true in these sections.  When reviewing this income always use knowledge of the guidelines, your experience, and a good tool like the Form 91 (keep in mind it is not the only tool out there!).

Line 8 Partnership Income
When working on a 1065 business, only put one business per Form 91.  Trying to lump together business and explain the outcome would require a long explanation on a 1008 supplement.  You are way better off just doing one form 91 per business.

Ordinary Business Income
Line 1 of the Schedule K-1

Net Rental Income
This line is a combination of lines 2 and 3 of the K-1

Guaranteed Payments
Line 4 of the K-1

Depreciation (IRS Form 1065)
Line 16 C from the 1065
NOTE many people try to add numbers from boxes 16A and 16B.  These boxes are NOT deducted from the companies gross profit (line 22) therefore are not added back on.

Deprecation (IRS Form 8825)
Line 14 from the 8825

Depletion
Line 17 from the 1065

Amortization or Casualty Loss
These are noted on a supplemental form, there is no “standard” form to put it on.  You will find the name of the form by looking at line 20 and looking for the attachment.  Many CPA’s put these deductions under “other” and file a statement (example statement 4).

Mortgage, Notes, Bonds payable is less than one year
Schedule L line 16.  This amount does not need to be deducted if you can document either of the following.  First the CPA documents that the amount in box 16 can be rolled over , or in other words, there are other options to pay off this debt (IE refinance).  The second option is if the company has enough cash show on Schedule L line 1D it also can be ignored.

Other Non-Recurring Income Or Loss
This guideline is referencing lines 4,5,6, or 7 in the 1065.  This is a tricky one to explain in less than 1000 words!  The short version is anytime you see a loss or income on these lines you must confirm that the income or loss is going to be ongoing for two years.  If you cannot, the income must be removed.  The loss can be added back on (I would not recommend it but you can).  This answer requires about five minutes of discussion, but I will leave it as this for now.

Travel and entertainment exclusion
Schedule M-1 line 4B.

Major Notes NOT disclosed on form 91 in regards to 1065 income evaluation.

1) Distributions are not mentioned in this grid, however, you can not use any of the income (except guaranteed wages line 4 of the k-1) on section 8 unless you can document that the business is distributing the income.   This is done by the K-1 confirming the distributions shown on line 19A are “in line” with the income calculated (see red arrow below from section 5304.1)

2) If any of the income used is from the 1065 business (starting with depreciation down to travel and entertainment) it must be first supported by Distributions (as noted above).  It then must be documented the borrower can access this income.  Section 5304.1 lists the income you are allowed to use without further documentation (for example an operating agreement) but nothing in that second section of the 1065 meets the “standard access” rule.

Line 9 S Corporation Income
When working on a 1120S business, only put one business per Form 91.  Trying to lump together business and explain the outcome would require a long explanation on a 1008 supplement.  You are way better off just doing one form 91 per business.

Ordinary Business Income
Line 1 of the Schedule K-1

Net Rental Income
This line is a combination of lines 2 and 3 of the K-1

Depreciation (IRS Form 1120S)
Line 14 from the 1065

Deprecation (IRS Form 8825)
Line 14 from the 8825

Depletion
Line 15 from the 1120S

Amortization or Casualty Loss
These are noted on a supplemental form, there is no “standard” form to put it on.  You will find the name of the form by looking at line 19 and looking for the attachment.  Many CPA’s put these deductions under “other” and file a statement (example statement 4).

Mortgage, Notes, Bonds payable is less than one year
Schedule L line 17.  This amount does not need to be deducted if you can document either of the following.  First, the CPA documents that the amount in box 17 can be rolled over, or in other words, there are other options to pay off this debt (IE refinance).  The second option is if the company has enough cash show on Schedule L line 1D it also can be ignored.

Other Non-Recurring Income Or Loss
This guideline is referencing lines 4 or 5 on the 1120S.  This is a tricky one to explain in less than 1000 words!  The short version is anytime you see a loss or income on these lines you must confirm that the income or loss is going to be ongoing for two years.  If you cannot, the income must be removed.  The loss can be added back on (I would not recommend it but you can).  This answer requires about five minutes of discussion, but I will leave it as this for now.

Travel and entertainment exclusion
Schedule M-1 line 3B.

Major Notes NOT disclosed on the form 91 in regards to 1120S income evaluation.

1) Distributions are not mentioned in this grid, however you cannot use any of the income (except W-2 Wages) on section 9 unless you can document that the business is distributing the income.   This is done by the K-1 confirming the distributions shown on line 16D are “in line” with the income calculated (see red arrow below from section 5304.1)

2) If any of the income used is from the 1120S business (starting with depreciation down to travel and entertainment) it must be first supported by Distributions (as noted above).  It then must be documented the borrower can access this income.  Section 5304.1 lists the income you are allowed to use without further documentation (for example an operating agreement) but nothing in that second section of the 1120S meets the “standard access” rule.

 

Adjustments to Business Cash Flow – Form 1120
When working on a 1120S business, only put one business per Form 91.  Trying to lump together business and explain the outcome would require a long explanation on a 1008 supplement.  You are way better off just doing one form 91 per business.

Depreciation
Line 20 of the 1120

Depletion
Line 21 of the 1120

Amortization/Casualty Loss
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

Net Operating Loss and Special Deductions
Line 29c of the 1120

Taxable Income or Loss
Line 30 of the 1120

Total Tax:
Line 31 of the 1120

Mortgage or Notes Payable in Less than 1 Year
Schedule L line 17.  This amount does not need to be deducted if you can document either of the following.  First, the CPA documents that the amount in box 17 can be rolled over, or in other words, there are other options to pay off this debt (IE refinance).  The second option is if the company has enough cash show on Schedule L line 1D it also can be ignored.

 

Nonrecurring income or loss
Lines 8,9, and 10  of the 1120.  This is a tricky one to explain in less than 1000 words!  The short version is anytime you see a loss or income on these lines you must confirm that the income or loss is going to be ongoing for two years.  If you cannot, the income must be removed.  The loss can be added back on (I would not recommend it but you can).  This answer requires about five minutes of discussion, but I will leave it as this for now.

Travel and entertainment exclusion
Schedule M-1 line 5C

 Major Notes NOT disclosed on the form 91 in regards to 1120 income evaluation.

If any of the income used is from the 1120 business (starting with depreciation down to travel and entertainment) AND the borrower is NOT 100% owner of the 1120.  It must be documented the borrower can access this income.  Section 5304.1 lists the income you are allowed to use without further documentation (for example an operating agreement) but nothing in that second section of the 1120 meets the “standard access” rule.

 

Section V

This part does not need any breakdown it is simply a summary of the income calculation on the sheet.  However, as I stated in paragraph before section 9 (the 1065) income. This is where just relying on the form will result in approving income that does not meet guidelines.  When reviewing this income always use knowledge of the guidelines, your experience, and a good tool like the form 91 (keep in mind it is not the only tool out there!)

 

This brings us to the end of the full review of the FNMA Form 1084, and FHLMC Form 91. I hope these tips can assist you in better income evaluation for your borrowers.  As a reminder, IncomeXpert is an income software suite that analyzes any borrower’s income (yes… all 30+ types listed in the FNMA/FHLMC Allregs guides).