self-employed borrower schedule analysis method …...schedule analysis method part ii, business...

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Self-Employed Borrower

Schedule Analysis Method or SAMPart II: Business Tax Returns

November 2018

2Schedule Analysis Method Part II, Business Return Review

Objective

-Learn to use SAM Form to calculate supportable income for self‏

employed borrowers, using K-1s and business tax returns

– Partnership income and expenses, IRS Form 1065 and associated K-1s

– S-Corp income and expenses, from IRS Form 1120S and associated K-1s

Fannie Mae policy is different from Freddie Mac‏

– We will review both in today’s session

Does Borrower Own 25% or More of a

Business?

3Schedule Analysis Method Part II, Business Return Review 3

Can checking the Self-Employed Indicator to yes -

increase the risk of loans when evaluated by DU®?

Loan Product Advisor®?

YesNo

Self-Employment Fannie Mae


Written Analysis of Income-Fannie Mae

Fannie Mae 2016 Selling Guide B3-3.2-01, Underwriting Factors and

Documentation for a Self-Employed Borrower (06/28/2016)


Written Analysis of Income-Fannie Mae


Fannie Mae 2016 Selling Guide B3-3.2-01, Underwriting Factors and

Documentation for a Self-Employed Borrower (06/28/2016)

11

Implementation Of Income Requirements

Freddie Mac Documentation Matrix

Documentation Matrix‏

– Assists in underwriting and

documenting loans for Freddie Mac

– Lenders may have overlays

– Check specific program

requirements

– Updated September 2018

12

http://freddiemac.com/learn

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

Freddie Mac Seller/Servicer Guide

13

When Do We Have To Tell Loan Product Advisor Our Borrower Is Self-

Employed?

Updated and Effective September 19,2018


Freddie Mac Self-Employed Documentation


Chapter 5304


5304 Income NOT On the Personal Returns


In Case Study Part I, We

Completed Sections 1-8

Personal Tax Return Review

You Will Need


:You will be working with John and Mary Homeowner who‏

– Own 33.33% of an LLC called Street Art Design Company (John)

• Reported on a Partnership Return 1065

• John receives a K-1

– Own 100% of an S Corporation called Modern Dwelling Enterprises, Inc. (Mary)

• Mary receives a K-1

• 1120S business tax return

• Mary & John receives a W-2 Wage Statements from the business

The Case Study


Training Tools and Information



25Schedule Analysis Method Part II, Business Return Review 25

Access SAM Reference Guide - Page 2


Analyzing IRS Form K-1


Analyzing Partnership Returns




5304.1 Stable Monthly Income


Freddie Mac Seller/Servicer Guide5304.1 Stable Monthly Income

32

1065 Partnership

Line 22 Ordinary Income/Loss

$_________

K-1

%


$_________

Schedule E page 2

Part II1040

Line 17 Net Income/Loss Sch.E

$_________

Taxed at a personal rate

Schedule Analysis Method Part II, Business Return Review

Check for trends or changes‏

– Gross receipts

– Cost of Goods Sold

– Gross Profit

– Bottom line “Ordinary Income”

:Note‏

– Guaranteed Payments can be

found on Line 10

– This is compensation paid to the

owners and has nothing to do

with distributions

Partnership 1065

Schedule Analysis Method Part II, Business Return Review‏ 33

Page 22

1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



Partnership K-1

Schedule Analysis Method Part II, Business Return Review‏35

Page 20

35

Rental Income - Partnership or S Corp

36

No Example


Partnership K-1

Schedule Analysis Method Part II, Business Return Review‏37

Page 20

37

1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



Schedule E


Page 12

1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



1040


Page 3

Remember - We Must Confirm Liquidity

…There was not a distribution so‏


Fannie Mae 2017 Selling Guide B3-3.2.2-01, Analyzing Partnership

Returns for a Partnership or LLC (6/28/2016)

K-1 Less than 25% Ownership


Liquidity

47

Generally Accepted Accounting Principles‏



Liquidity - Current Ratio


Balance Sheet


Page 26

Balance Sheet


(Cash #1 + Acct Receivable #2 + #4+ #5 +Other Current Assets #6)

(Acct Pay. #15 + MNB #16 + Other Current Liabilities #17)

Quick Ratio or Acid Test

Current Assets :

Current Liabilities:

Current Assets:

Current Liabilities: .201 - Solvency

$765 + 0 + 0 +0+0 = $765

$0 + $0+ $3,800 = $3,800

Page 26


Liquidity


Follow The Guidelines For The Investor You Are Underwriting To And

Provide Justification For Decisioning

Quick Reference Guide Partnership K-1


Genworth Calculator Is A Tool. Lenders/Underwriters Review Each Loan

File And Determine Compliance With Fannie Mae Or Investor Guidelines.

Partnership K-1


Can We Use Ordinary Income/Rental Income From the K-1?

Was There A Distribution? Was Liquidity Verified?

Page 20



Genworth Calculator Is A Tool. Lenders/Underwriters Review Each Loan

File And Determine Compliance With Fannie Mae Or Investor Guidelines.

Partnership K-1

55

Page 20


Before You Give Credit For The Guarantee Payments, Does This Business Appear to

Be Capable Of Paying It In The Future? Could We Look At The Balance Sheet Again?

Balance Sheet


Page 26

Could We Verify What Is Included On Line 17? Our Borrower Indicated The

Business Loan Listed Has Been Paid Off And Provided Evidence When Advised

That The Business Did Not Appear Solvent

Liquidity Test Without The Loan


Do You Feel More Comfortable Using The Guaranteed Payment Now?



Guaranteed Payments Can Be Used; Follow Investor Guidelines

SAM Form Section XI, IRS Form 1065


Page 22

Partnership Form 1065


Page 22

S Corporation Form 1120S




Page 22

Review The Statement

The statement must be reviewed to determine if “other deductions” includes

amortization and/or casualty losses. None have been identified in this return.

Schedule Analysis Method Part II, Business Return Review‏ 63

Page 28



Page 26

Partnership K-1


Page 20

SAM Form Section X, IRS Form 1065



Calculator and Quick Reference Guide

SAM Quick Reference Guide Form – Page 2 Section XI S-Corp K-1s

S Corporation Income - Fannie Mae


1120S Corporation


$_________

K-1

%


Schedule E page 2

Part II

Net Income/Loss $_______

1040

Line 17 Net Income Sch.E

*$_________

*Taxed at a personal rate


Check for Trends or Changes‏

– Gross receipts

– Cost of goods sold

– Gross profit

– Bottom line “Ordinary Income”

– W-2 wages

• Were these paid to borrower?

S Corps


Page 33

S Corps


Page 38

Compensation of Owners And/Or Officers From Line 7; Did We Give Credit

For Mary’s W-2 Already?


1120S Corporation


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


*$_________



S Corp K-1

Did Mary get a distribution?


Page 31

of K-1 and Page 3 of Form 1120S


Page 32

1120S Corporation


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


*$_________



Schedule E Partnerships and S Corps


Page 12

1120S Corporation


$_________

K-1

%


$_________

Schedule E page 2

Part II1040


*$_________




Page 3

Before We Can Use The Income

…Was there a distribution? If not then‏


Fannie Mae 2017 Selling Guide B3-3.2.2-02, Analyzing Returns For

An S Corporation (6/28/2016)


Chapter 5304


Liquidity


Balance Sheet


Page 36

Balance Sheet

Quick Ratio or Acid Test

Current Assets :

Current Liabilities:


(Cash #1 + Acct Receivable #2 + #4+ #5 +Other Current Assets #6)

(Acct Pay. #16 + MNB #17 + Other Current Liabilities #18)

Current Assets:

Current Liabilities: .045 - Solvency

$6,530 + 0 + 0 +0+ $5,578 = $12,108

$146,222 + $0+ $124,347 = $270,569

Page 36

Liquidity

89



Review for W-2 Paid from Business‏

– Did we give credit for this income already?

AS A REMINDER…..


Page 1

1120S K1 Review


S Corp K-1

Did Mary get a distribution?


Page 31

S Corp K-1


Page 31

Let’s put numbers on our tool‏

S Corp K-1 Review‏

– Was there a distribution?

S Corp K-1


Page 31



Page 33



Page 42



Page 36



Page 37

S Corp K-1

?How much does Mary own‏


Page 31



Do you feel comfortable using the W2 income to qualify?

Do Not Use Any W-2 Income For John Or Mary From Modern Dwelling

And You Are NOT Required To For Modern Dwelling Enterprises Losses;

Try to Qualify Using the Partnership Income and Schedule C Income

Fannie Mae


Freddie Mac


Requires Sellers To Account For Business Losses If It Is Their Primary

Source Of Income; Other Option Would Be To Take Mary Off The Loan,

BUT Still Not Use John’s W-2 Wages From The Business

Genworth Underwriting Guidelines


Genworth Rate Express®

Schedule Analysis Method Part II, Business Return Review 112

LOS Connections

Schedule Analysis Method Part II, Business Return Review113


Schedule Analysis Method Part II, Business Return Review 115

Additional MI Site Information



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➢ Your Local Genworth

Regional Underwriter

➢ Your Genworth Sales

Representative

Your Genworth Resources


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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.

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self-employed borrower schedule analysis method …...schedule analysis method part ii, business...

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