Self-Employed Borrower: Case Study Part I: Completing the Form 91 with Personal Tax Returns (Webinar...

Tax Return Review Using Form 91 Case Study Part 1

©2012 Genworth Financial, Inc. All rights reserved.

SEB-

Form 91

Objective

”Understand the meaning of “Self Employed‏

Learn to use Freddie Mac’s Form 91 to calculate supportable‏income for self-employed borrowers using tax returns.

Complete Freddie Mac’s Income Analysis Form 91‏

– Calculate Expenses reported on a 2106 (Un-reimbursed Business Expenses) Schedule A

– Calculate income from a Schedule C (Sole Proprietor) or 1099 Borrower

– Consideration of Capital Gains & Losses Schedule D

– Calculating Net Rental Income from Schedule E

– Calculating income from a Schedule F (Farm)

SEB-Form 91

2

IRS 4506-t or similar forms‏

– Allows lenders to obtain transcripts of

the tax returns for borrowers for free.

– Once signed and dated by applicant

the form is good for 120 days.

– 4506 or 8821 may also be used in lieu

of the 4506-t but these forms typically

cost to execute.

– Fannie Mae & Freddie Mac policy

requires the form to be signed at

application and again at closing if it

was not executed.

– Lenders typically may use discretion

as far as executing it with the IRS but

Fannie Mae “highly recommends “ it.

IRS Form 4506-t

®Desktop Underwriter is a registered trademark of FannieMae

www.irs.gov

SEB-

Form 91

SEB-Form 91

Sample 4506t results

SEB-Form 91

4506T Review

-Verify‏– Name

– Address

– SS#

-Review‏– Wages/W-2 Reported Line 7

– Alimony Received Line 11

– Schedule C Income/Loss Reported Line 12

– Scheduled D Capital Gains/Losses Reported Lines 13 & 14

– Schedule E Rental, K-1 1065, K-1 1120S, Trust Income/Losses Reported Line 17

– Schedule F Farm Income/Loss Reported Line 18

– Unemployment Compensation Received Line 19

– Alimony Paid Line 31a

– Schedule A Itemized Deductions

• Mortgage Interest Paid

• Real Estate Tax Deduction

• 2106 Expenses

4 SEB-Form 91

Does your borrower own 25% or more

of a business?

5

Does checking the Self Employed Indicator to yes-

increase the risk of the loan when evaluated by LP?

SEB-Form 91

Self Employed Indicator

SEB-Form 91

Does your borrower own 25% or more

of a business?

7

Does checking the Self Employed Indicator to yes-

increase the risk of the loan when evaluated by DU?

Yes No

SEB-Form 91

SEB-Form 91

You’ll Need-

SEB-Form 91

The Case Study… The Case Study is a married couple John & Mary

Homeowner

Mary receives a W2 & a K 1 from a business she owns

67% of Zen Today, Inc. She has declared un-reimbursed

expenses against that income on a #2106.

Mary also operates a Sole Proprietorship that she

operates out of their home.

John owns 58% of an LLC. The LLC files a 1065 and

issued John a K 1. Recycle Fitness, LLC. He has

declared un-reimbursed expenses against that income.

Mary & John also own a Rental Property and a Apple

Orchard.

SEB-Form 91

Income Analysis Form 91

http://freddiemac.com/learn/uw/form_91.html

This is an interactive tool, you can enter data and

The website will do the calculations but remember

Garbage in Garbage out!

SEB-Form 91

Income Analysis Form 91 Cheat Sheet

SEB-

Form 91


Individual Tax Return (1040) 2011

1. W-2 Income from SE

Are any W2 wages filed? If yes, does the

borrower own more than 25% of the entity

that issued the W2?

SEB-Form 91

SEB-Form 91

Form 1040

We will use the 1040 to identify the

if any wages were reported (line

7).Then we will review the

corresponding W2 forms.

Page 3




Page 2

Is Mary Self Employed?

SEB-Form 91

SEB-Form 91


Page 13



When a Borrower files a K1 it must be reviewed for % of ownership and

potential losses!

SEB-Form 91

1120S K1

Page 35


Individual Tax Return (1040) 2010 2011

1. W-2 Income from SE 73,500 74,700

Page 2

SEB-Form 91

SEB-Form 91


Total Expenses (-) 0 (-)________ Depreciation (+) 0 (+)________

2. Form 2106-Employee Business Expenses

Check Schedule A to see if a #2106 form has been

completed by the borrower.

2010 2011

Did Your Borrower file a Schedule A?

Review Line 40 Entry vs. Standard Deduction Values on Page 2 of 1040‏

Page 4

SEB-Form 91

SEB-Form 91

Schedule A Expenses

Page 5

When a 2106 Worksheet has

been completed you must

review it for total expenses

declared!

SEB-Form 91

Line 8 (a+b)= Total Expenses

2106 Worksheet

Page 15

SEB-Form 91


Total Expenses (-) 15,355

Depreciation (+) 0


12,455(miles) x .22cents= $2,740 of depreciation

In 2011 the standard mileage deduction was 51 cents which

includes 22 cents of depreciation on the vehicle.

Paper expenses = Qualifying Income!

Page 16

2106 Worksheet for Mary’s W-2 Wage

SEB-Form 91

Depreciation Factor

SEB-Form 91

SEB-Form 91



Depreciation (+) 2,740


By offsetting the claimed unreimbursed expenses with the depreciation it

is now *$15,355- $2,740= $12,615

By reducing the annual income of $74,700 by the $12,615 will equal the

qualifying income.

$74,700- $12,615= $62,085 /12= $5,173 per month

*Some Investors require the Lender to establish a two year average and

reduced the Borrower’s income. If a two year average can not be

documented the annual expense will be used as a monthly liability.


1. W-2 Income from SE 74,700

$62,085

Depreciation Factor

Automobile Depreciation‏

If a borrower claims a “standard mileage” deduction, the business‏

miles driven should be multiplied by the depreciation factor for the

appropriate year, and the calculated amount added to the borrower’s

cash flow.

If a borrower claims an “actual depreciation expense” deduction, the‏

amount the borrower claimed should be added to the borrower’s cash

flow.

‏

26 SEB-Form 91

2106 Expenses Nonreimbursed Employee Expenses

,When a borrower has nonreimbursed business expenses, such as classroom supplies‏

uniforms, meals, gasoline, automobile insurance, and/or automobile taxes, the lender must

determine the borrower’s recurring monthly debt obligation for such expenses by developing a

24-month average of the expenses, using information from the borrower’s IRS Form 1040

including all schedules (Schedule A and IRS Form 2106) and net out any automobile

depreciation claimed on IRS Form 2106.

Consequently, when calculating the total debt-to-income ratio, the 24-month average for‏

nonreimbursed expenses should be subtracted from the borrower’s stable monthly income,

unless such expenses are automobile lease payments or automobile loan payments, in which

case they are to be considered part of the borrower’s recurring monthly debt obligations. If

there is not a 24-month history of such expenses, the lender should develop an annualized

monthly average for the expenses and add this calculated amount to the borrower’s monthly

debt obligations.

2012 Selling Guide

Part B, Origination Through Closing

Subpart B3, Underwriting Borrowers

Chapter B3-6, Liability Assessment

B3-6-05, Monthly Debt Obligations (05/24/2011)

Title: B3-6-05, Monthly Debt Obligations (05/24/2011) Copy To Clipboard Document ID: 900c5f08-5ce1-4919-9db6-4303b8658cf0 Copy To Clipboard Document Name:

003707958@partb_origthruclosing!b3_underwriteborrowers!b3_6_liabilityassess!b1_b0134 Copy To ClipboardClose

27 SEB-Form 91

SEB-Form 91


Net Profit or Loss (+) 0

Nonrecurring Other (Income) (-) 0

Depletion (+) 0

Depreciation (+) 0

Meals & Entertainment Exclusion (-) 0

Amortization/Casualty Loss (+) 0

Business Use of Home (+) 0

3.Schedule C- Sole Proprietorship 2011

SEB-Form 91

Schedule C Sole Proprietor

Page 7

SEB-Form 91

SEB-Form 91


Net Profit or Loss (+)24,040

Nonrecurring Other (Income) (-) 0

Depletion (+) 0

Depreciation (+) 0





Schedule C Sole Proprietor

Is “Other Income” Regular & Reoccurring?

Is a Gas or Fuel Credit?

Page 7

SEB-Form 91

SEB-Form 91



Nonrecurring Other (Income) (-) 2,876

Depletion (+) 0

Depreciation (+) 0





Schedule C Sole Proprietor Part II

Page 7

SEB-Form 91

SEB-Form 91




Depletion (+) 0

Depreciation (+) 0






Page 7

4562 or page 2 part IV of

Schedule C

Start with what is on line 13

first, if no ratio issue…move on!

SEB-Form 91

Schedule C page 2

Page 8

Business miles from 44a (13,863) x .22 cents (depreciation factor)

= $3,049 in depreciation!

SEB-Form 91

Form 4562 page 1

Page 19

SEB-Form 91

Form 4562 page 2

Page 20

Business miles from line 13 (13,863) x .22 cents (depreciation

factor) = $3,049 in depreciation!

SEB-Form 91


Page 7

4562 or page 2

4,877 + $3,049 = $7,926 Total Depreciation

3,049

SEB-Form 91

Car & Truck Expense Worksheet

This worksheet will not be included in the “Client Copy” but can be retrieved from the tax preparer

Shows the Interest included in

the Total reported on Line #9 on

Sch. C.

42 SEB-Form 91

Borrower Debt Fannie Mae 2012 Selling Guide B3-6-05, Monthly Debt Obligations (05/24/2011)‏

Business Debt in Borrower’s Name‏ When a self-employed borrower claims that a monthly obligation that appears on his or her personal credit report is being paid‏

by the borrower’s business, the lender must confirm that it verified that the obligation was actually paid out of company funds

and that this was considered in its cash flow analysis of the borrower’s business.

:The account payment does not need to be considered as part of the borrower’s individual recurring monthly debt obligations if‏

,the account in question does not have a history of delinquency‏

the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled‏

company checks), and

.the lender’s cash flow analysis of the business took payment of the obligation into consideration‏

The account payment does need to be considered as part of the borrower’s individual recurring monthly debt obligations in any‏

of the following situations:

.If the business does not provide sufficient evidence that the obligation was paid out of company funds‏

If the business provides acceptable evidence of its payment of the obligation, but the lender’s cash flow analysis of the‏

business does not reflect any business expense related to the obligation (such as an interest expense—and taxes and

insurance, if applicable—equal to or greater than the amount of interest that one would reasonably expect to see given the

amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not

been accounted for in the cash flow analysis.

If the account in question has a history of delinquency. To ensure that the obligation is counted only once, the lender should‏

adjust the net income of the business by the amount of interest, taxes, or insurance expense, if any, that relates to the account

in question.

43 SEB-Form 91

SEB-Form 91




Depletion (+) 0







Page 7

SEB-Form 91

SEB-Form 91




Depletion (+) 0


Meals & Entertainment Exclusion (-) 3,050




Part V Casualty Losses & Amortization are added back to qualifying income!

Schedule C

SEB-Form 91

SEB-Form 91




Depletion (+) 0



Amortization/Casualty Loss (+) 1,471




Page 7

SEB-Form 91

8829 Business Use of Home

As the percentage of usage increases a more critical look at the collateral is required. Additional home owners

insurance coverage may also be required. If the transaction is a purchase for a new primary residence will the

Gross Sales of the business be impacted on the relocation of the business?

Page 17

SEB-Form 91

Line #14 Casualty Losses, Interest and Real Estate Taxes may be added back to

qualifying income!


SEB-Form 91

Line #41 Depreciation may be added back to qualifying income!

$2,825 + N/A= $2,825 your underwriter may only allow this amount to be added

back.


SEB-Form 91

SEB-Form 91




Depletion (+) 0



Amortization/Casualty Loss (+) 1,471

Business Use of Home (+) 2,825


$30,336

SEB-Form 91

Principal Payments Received (+) 0


Recurring Capital Gains

(Loss) (+) 0

2011

4. Schedule D- Capital Gains & Losses

6. Form 6252- Installment Sale Income

5. Form 4797- Sales of Business Property (+/-) 0

Line 6

You have already negated the -$3,000 from the front page of the 1040.

Schedule D

SEB-Form 91

$3,000 is the maximum allowable write-off if married filing a joint return. Next

year the remaining $56101 will carry over.

Does losing money on an investment and writing that loss off on paper impact

the borrower’s cash flow? Does it impact their ability to make a mortgage

payment?

Schedule D

SEB-Form 91

SEB-Form 91

#6252 Installment Sale Schedule D

#4797 Sales Business Property

Taxable Income $_______

1040

Line 13 Capital Gain/Loss

Sch.D $_________

Line 14 OtherGain/Loss #4797

$_________

4797 may report onto

Sch.D or directly to 1040!

SEB-Form 91

Form 4797

No Example in Case Study

SEB-Form 91

Form 6252

No Example in Case Study

SEB-Form 91

Principal Payments Received (+) 0


2011

4. Schedule D- Capital Gains & Losses

6. Form 6252- Installment Sale Income

5. Form 4797- Sales of Business Property (+/-) 0

SEB-Form 91


Gross Rents & Royalties (+) 0

Total Expenses (-) 0

Amort/Cas Loss/Nonrec Loss, Depr (+) 0

Insurance, Mtg Interest, RE Taxes (+) 0

7.Schedule E- Supplemental Income & Loss 2011

Line7

Schedule E- Rental

Page 12

SEB-Form 91

SEB-Form 91


Gross Rents & Royalties (+) 18,600

Total Expenses (-) 0




Line7

Schedule E- Rental

Page 12

SEB-Form 91

SEB-Form 91







Line7

Schedule E- Rental

Page 12

SEB-Form 91

SEB-Form 91




Amort/Cas Loss/Nonrec Loss, Depr (+) 11,168

Insurance ,Mtg Interest, RE Taxes (+) 0


Line7

Schedule E- Rental

Page 12

SEB-Form 91

SEB-Form 91




Amort/Cas Loss/Nonrec Loss, Depr (+) 11,168

Insurance ,Mtg Interest, RE Taxes (+) 14,166


= $16,480

= $16,480 /12= $1,373 -Mtg Payment $1,679

= $305 Net Rental Loss

SEB-Form 91


Net Profit or Loss (+) 0

Non-Tax Portion Coop & CCC Payments (+) 0

Nonrecurring Other (Income) Loss (-) 0

Depreciation (+) 0

Amort/Casualty Loss/Non Loss (+) 0

Business Use of home (+) 0

2011 8. Schedule F- Profit or Loss from Farming

Line 8

Schedule F

SEB-Form 91

SEB-Form 91


Net Profit or Loss (+) 15,132

Non-Tax Portion Coop & CCC Payments (+) 0


Depreciation (+) 0




Line 8

3a $8,000 – 3b $4,000= $4,000 nontaxable income

$4,000 x 125% = $5,000 of Gross Income

Cash Flow Analysis 1084

SEB-Form 91

SEB-Form 91



Non-Tax Portion Coop & CCC Payments (+) 5,000


Depreciation (+) 0




Line 8

Schedule F

Page 14

SEB-Form 91

SEB-Form 91




Nonrecurring Other (Income) Loss (-) 10,000

Depreciation (+) 0




Line 8

Schedule F

4562

Page 14

SEB-Form 91

SEB-Form 91





Depreciation (+) 0




Line 8

Schedule F

Page 14

SEB-Form 91

SEB-Form 91





Depreciation (+) 0




Line 8

$10,132

1040 Income Section

Always subtract line 20b as this is the taxable amount of social security…it’s self employed income and

should be entered on your 1003 separately. (-) 20b

81 SEB-Form 91

Using Nontaxable Income Fannie Mae 2012 Selling Guide B3-3.1-04, Using Nontaxable Income to Adjust the‏

Borrower’s Gross Income (04/01/2009)

Using Nontaxable Income to Adjust the Borrower’s Gross Income‏

The lender should give special consideration to regular sources of income that may be‏

nontaxable, such as child support payments, Social Security benefits, disability

retirement payments, workers’ compensation benefits, certain types of public

assistance payments, and food stamps.

.The lender must verify that the particular source of income is nontaxable‏

Documentation that can be used for this verification includes award letters, policy

agreements, account statements, or any other documents that address the nontaxable

status of the income.

If the income is verified to be nontaxable, and the income and its tax-exempt status are‏

likely to continue, the lender may develop an “adjusted gross income” for the borrower

by adding an amount equivalent to 25% of the nontaxable income to the borrower’s

income.

If the actual amount of federal and state taxes that would generally be paid by a wage‏

earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income,

the lender may use that amount to develop the adjusted gross income, which should be

used in calculating the borrower’s qualifying ratio.

82 SEB-Form 91

1040 Income Section

Like all non-SEB income if you document the income source is regular & recurring with a probable

future it may be added to the income screen.

In this example the applicant has received $8,891 in benefits and $7,557 of it was taxable as indicated in

(20b) this indicates that only the difference of 20a and 20b is tax free.

$8,891

-$7,557

=$1,334 tax exempt

83

$7,557

=$1,334 x 125%= $1,667

$9,224 total income

SEB-Form 91

84

Freddie Mac Verbal Verification of‏

Employment

– As per Freddie Mac Bulletin 2009-18

sellers are required to verbally verify

employment for certain borrowers

using Form 90 or a similar form

– Be sure if using a different form, it

captures the required information as

per the Freddie Mac Seller

– As per Freddie Mac Bulletin 09-27

sellers are required to obtain the

Verbal VOE not more than 10

Business days prior to the Note Date

rather than 10 calendar days

http://freddiemac.com/learn/qr.html

Freddie Mac Form 90 Verbal Verification of

Employment

SEB-

Form 91

SEB-Form 91

Legal Disclaimer

Genworth Mortgage Insurance is happy to provide you with these training‏

materials. While we strive for accuracy, we also know that any discussion of laws

and their application to particular facts is subject to individual interpretation,

change, and other uncertainties. Our training is not intended as legal advice, and

is not a substitute for advice of counsel. You should always check with your own

legal advisors for interpretations of legal and compliance principles applicable to

your business.

,GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES‏

EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF

MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH

RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO

EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT,

INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND

WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS.

‏

85 ©2012 Genworth Financial, Inc. All rights reserved.

Self-Employed Borrower: Case Study Part I: Completing the Form 91 with Personal Tax Returns (Webinar...

Documents

Transcript of Self-Employed Borrower: Case Study Part I: Completing the Form 91 with Personal Tax Returns (Webinar...