Underwriting for Self-Employed Borrowers

Presented by:

Blaine Rada

Customer Training Manager

CMG Mortgage Insurance Company

blaine.rada@cmgmi.com

General Guidelines• Self-Employed Definition: at least ___% owner• Stability: at least __ years• Documentation Requirements: __ years of tax

returns, plus:– YTD Income Statement/P&L (when necessary)– IRS Form 4506/4506-T (both at application &

closing)– Lender to verify the existence of the business

within ___ days of closing

2

When You Need Tax Returns• Self-Employment• Commission Income

– Unreimbursed Expenses• Rental Income• Member works for his/her family

3

Sole Proprietor• Net income is found on pg. 1 of the 1040 (line 12)• Schedule C

– Add Depreciation (+): line 13

– Add Business use of home (+): line 30– Subtract Meals and Entertainment (-): line 24b– Something else to consider:

• Loans paid by the business (see line 16)

4

Farming Income• Net income is found on pg. 1 of the 1040 (line 18)

• Schedule F– Add Depreciation (+): line 16

5

6

Partnerships and S- Corporations• Schedule E (1040 Form):

– Part./S-Corp. income/loss line 32– Add Section 179 expense (+) line 29b(column i)

• Schedule K-1 (for ownership percentage)– Partnership K-1

• Partner’s share of capital (“Ending”) line “J”– S-Corporation K-1

• Shareholder’s % of stock line “F”• These are pass-through companies

– The company result is reported on the owner(s) tax returns based on the % of ownership

7

Partnerships and S- Corporations(continued)

• Form 1065 (Partnership)– Add Depreciation (+): line 16a

• Multiply times the ownership %

• Form 1120S (S-Corporation)

– Add Depreciation (+): line 14• Multiply times the ownership %

– FYI… the borrower may also receive a W-2 in addition to the pass-through income

8

Corporations• Form 1120

– Wages shown as W-2 income on personal tax return– No K-1 Schedule

• See Compensation of Officers on pg. 2 of the 1120– Column (d) or (e) will contain the ownership %

– Not a pass-through company• The business result can be different from the personal

income– Add Depreciation (+): line 20– Add Net Operating Loss (+): line 29a– Taxable Income/Loss (+) or (-): line 30

• If positive, subtract the total tax due (-): line 31

– Don’t forget to multiply by the ownership %

9

Business Tax Return Considerations

• Use discretion when using business income (over and above personal income)– Ask these questions:

• Is the borrower at least __% owner?• Is there a __ yr. history of this income?• Is there a negative impact on the company if this

income is taken for personal use?– ___ party opinion

• Under what conditions are business tax returns not required?: (all 3 must be met)– – –

Additional Points to Ponder

• What about LLC’s?

• How about “mortgages, notes, bonds payable in less than 1 year”?

• Do these guidelines apply to business/commercial lending?

10