One of the more challenging areas in building UberWriter is getting agreement from FHA DE’s on the details of determining self-employed income. I spent my career mainly working in the conventional, jumbo, and MI contractor worlds. In these positions, I have worked on numerous borrowers who have anything from a simple schedule C, up to borrowers who had over 100 K-1’s reporting income. However for government loans what I find is there seems to be some application of conventional guidelines added to FHA loans causing us to not be quite as exact as we would like to be.
First, let me tell you the “why” behind this issue. The first reason is that FHA borrowers are less likely to be self-employed than their conventional counterparts. So the full-time DE may not be as versed in 1065 tax returns simply because it is infrequent in the day to day. My second reason is when you call the HOC’s they tend to reference forms like 1084 from Fannie Mae instead of their own guidelines in appendix two!
On April 23rd we are making some adjustments to our FHA calculations in UberWriter. We are going to take the next few blogs and talk about some of the changes and why we are updating the calculator.
Meals and Entertainment
This line item is found on Schedule C, 1065, the 1120S, and 1120 per Appendix 2 this is not a required deduction for any business type. When I have asked people on email, blogs, or in person on why they deduct it for FHA the answer is “The 1084 shows it as a deduction”. While I agree the 1084 says to deduct it, that is also supported by the guidelines stating to deduct it as well for FNMA. I often follow up with this question “The 1084 says to add back at home office expenses on Sch C Line 30, does FHA allow that”? The response is no, unless you confirm it is only the PITI. This is where the confusing part comes in. On one hand, I am advised to follow what 1084 says, but on the other hand, I am told not to follow what 1084 says.
I want to stop here and say, I am not trying to start an online boxing match between the two factions, but I am trying to open an honest dialog.
So log into the 4000.1 (https://www.allregs.com/tpl/Main.aspx) to post those comments! I want to hear from you whether you are a “pro-deduction” or “anti-deduction” and why you are in that camp 😊
My view is this, while using the 1084 which is…. well… an “ok” tool (UberWriter is much better), the guidelines trump any tool used. I know some situations have grey areas but this deduction in my opinion does not fall into that category. The 4000.1 seems clear…and that is “leave it alone”
Next week, the topic is on rental income! Until then keep it frosty!