Blueprint

Self Employed Borrowers and Allowable Income

tax forms

Regulation Change Update:

The following blog was posted in January of 2013 and the regulations have changed since we posted.  

Question:

When reviewing business tax returns such as 1165, 1120S, and 1120, should we treat any additional income derived from the business returns all the same regardless of FNMA or FHLMC?

Answer:

FNMA and FHLMC have different rules for each of the business income types and must be analyzed differently. The chart below shows how to apply the additional business income or loss depending on the type of business returns reviewed.

Business TypeAgencyTax FormExplanation of IncomeAllRegs Reference
Partnership / LLCFNMA1065 Allows for addition or subtraction of borrower’s percentage of ownership.FNMA
B3-3.2.2-01
Partnership / LLCFHLMC1065Only allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership. FHLMC
SSG vol 1
37.13 sec vii B
S CorporationFNMA1120SAllows for addition or subtraction of borrower’s percentage of ownership. FNMA
B3-3.2.2-03
S CorporationFHLMC1120SOnly allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership.FHLMC
SSG vol 1
37.13 sec vii B
CorporationFNMA1120Not allowed for additional income UNLESS borrower is 100% owner. However borrowers percentage of losses must always be subtracted. FNMA
B3-3.2.2-03
 Corporation FHLMC 1120 Only allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership. FHLMC
SSG vol 1
37.13 sec vii B

 

I have always found the 1084 and form 91 lacking because they don’t do a great job in explaining every line of the business tax returns from which you can get additional income with which to qualify a borrower.  The also fail to tell you about the requirements we just reviewed.

 

Simple Solution and Shameless Plug

If you would like to ensure you get every bit of income possible for your borrower to qualify, you need a good income calculation tool.  IncomeXpert is designed to handle every kind of borrower; especially the tough ones.  It’s a web based tool that knows over 30 types of income such as schedule C, 1120’s, 1065’s, REO income, military income, and many more.   IncomeXpert tells you exactly what tax form and what lines from the tax forms to enter.  On top of all that, it does all the math for you using FNMA and FHLMC rules.  It only takes a few minutes to use even for the most complex income scenarios, and prints a PDF for your file to make it underwriter or audit review ready.

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