self- employed borrower fannie mae cash flow form 1084 part ii... · business tax returns; personal...

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Self- Employed Borrower

Fannie Mae Cash Flow Form 1084 Part II Business Returns

April 2017

Investors (Fannie Mae, Freddie Mac, Private Investors) require it be‏

determined that self-employed borrowers demonstrate the financial

ability to repay the mortgage.

– History

– Income calculation

– Continuance / Stability of income

Lender Responsibility

2

Today’s Session Covers Conventional Loans and Reviews K-1’s And

Business Tax Returns; Personal Returns Are Reviewed in Part I.

Fannie Mae Cash Flow Analysis Form (Form 1084) Pt II

Learn to use the Fannie Mae Cash Flow Analysis Form (Form 1084)‏

and data from tax returns to calculate supportable self-employed

borrower income.

– Calculate Partnership Income and Expenses from K-1s and Form 1065

– Calculate S Corp (Sub-Chapter S) Income and Expenses from K-1s and Form

1120S

Objective

3Fannie Mae Cash Flow Analysis Form (Form 1084) Pt II

SEL 2015-09‏– Cash Flow Analysis Form updated

– Sections of Chapter B3-3-2 for Self-

Employed Borrowers updated

• Evidence of liquidity if no distributions made

from partnerships or S corps

– DU updated to allow one year personal

and business tax returns for certain case

files

– Changes effective for applications dated

February 1, 2016

Fannie Mae Updates


Note The Requirement To Evidence Access To Income Has Since Been

Removed By Fannie Mae

2016 Fannie Mae Updates

SEL 2016-05‏– Updates to Business Income

• Eliminate requirement to confirm

borrower has access to income

• Guidance for methods lenders may use

to determine adequate business liquidity

when liquidity assessment is required

• Verbal verifications of employment for a

self-employed borrower can be obtained

within 120 days prior to note date

– Chapter B3-3-1.07, 09 and B3-3-2 of

the Selling Guide have been updated

– Effective on or before October 1, 2016



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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)


You’ll Need


In Case Study Part I We

Completed Sections 1-6 of

the Personal Tax Returns


:You will be working with John and Mary Homeowner who‏

– Own 50% of an LLC called MHI (Mary)

• Reported on a 1065 Partnership Return

• Mary receives a K-1

– Own 100% of an S Corporation called Always Watching Security, Inc. (John)

• John receives a K-1

• John receives a 1120 S Corp Tax Return

• John receives a W-2 Wage Statement from the business

The Case Study


-Access your Cash Flow Quick Reference Guide Form‏ page two

Calculator and Quick Reference Guide


Analyzing Partnership Returns


Partnership (General or Limited)‏

– Two or More Partners

– Business Income Reported on Form 1065

– Personal Income Reported on Schedule E and K-1

– Income Taxed at Personal Rate

– All owners are issued a K-1s which are attached to the business tax return (IRS

Form 1065)

Advantages‏

– Taxed at Personal Rate (Partnership Pays No Tax on Income)

– Limited Partnership - Only Liable for Amount Invested

Disadvantages‏

– General Partnerships Have Unlimited Personal Liability for Partnership Debts

and Losses

Business Classifications


25

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


Check for trends or changes‏

– Gross receipts

– Cost of Good Sold

– Gross Profit

– Bottom line “Ordinary Income”

Partnerships

26


1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



Partnership K-1

28

Page 17


Rental Income - Partnership or S Corps

29Schedule Analysis Method Part II, Business Return Review

No Example

Partnership K-1

30

Page 17


Was The Ordinary Income Distributed To the Owner?

1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



Schedule E

32Fannie Mae Cash Flow Analysis Form (Form 1084) Pt I

Page 11

1065 Partnership


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


$_________



1040


Remember We Must Confirm Liquidity

…There was not a distribution so‏


Fannie Mae 2016 Selling Guide B3-3.2.2-01, Analyzing Partnership

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

K-1 Less than 25% Ownership


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38

Liquidity- Quick Ratio

Generally Accepted Accounting Principles‏


39

Liquidity-Current Ratio



Balance Sheet


Page 23

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

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

Balance Sheet

Quick Ratio or Acid Test

Current Assets :

Current Liabilities:

Current Assets:



Page 23

$10,308 + 0 + 0 +0+0 = $10,308

$0 + $0+ $0 = $0

42

Liquidity


-Access your Cash Flow Quick Reference Guide Form‏ page two



Note The Requirement To Evidence Access To Income Has Since Been

Removed By Fannie Mae

Partnership K-1

44

Page 17


Partnership K-1

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

Was There A Distribution? Was Liquidity Verified?


Page 17

Partnership Form 1065


Page 19



Page 19



Page 24



Page 19



Page 23



Page 19



Page 23



Page 19

Partnership K-1


Can We Use To Qualify? Was The Business Liquid/Solvent?

S Corporation Income


S Corporation‏

– Can be owned by one person

– “Managing Shareholder” must receive a salary

– Business Income Reported on Form 1120S

– Income reported on Form 1040’s

• Schedule E

• Could also be W-2 wage or 1099 income

– All shareholders of an S Corp are issued K-1’s

– K-1s are attached to the S Corp tax return (IRS Form 1120S)

Advantages‏

– Taxed on Personal Basis

• S Corp Pays No Tax on Income

– Liability Limited to Amount Invested

Disadvantages‏

– Limited to 100 Shareholders

Business Classifications


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 27

S Corp K-1


Page 25

of K-1 and Page 3 of Form 1120S


Page 26

1120S Corporation


$_________

K-1

%


$_________

Schedule E page 2

Part II

1040


*$_________



Schedule E Partnerships and S Corps


Page 11

1120S Corporation


$_________

K-1

%


$_________

Schedule E page 2

Part II1040


*$_________




Page 2

Before We Can Use The Income

…Was there a distribution? If not then‏


Fannie Mae 2016 Selling Guide B3-3.2.2-02, Analyzing Returns For

An S Corporation (6/28/2016)


Liquidity


Balance Sheet


Page 30

Balance Sheet

Quick Ratio or Acid Test

Current Assets :



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

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

Current Assets:

Current Liabilities: 2.09 - Solvency

$8,972 + 0 + 0 +0+0 = $8,972

$0 + $0+ $4,286 = $4,286

Page 30


Liquidity


S Corp K-1


Page 25

Let’s put numbers on our tool‏

S Corp K-1 Review‏

– Was there a distribution?

S Corp K-1


Page 25

S Corporation Form 1120S


Page 27



Page 27



Page 32



Page 27



Page 30



Page 27



Page 31

S Corp K-1

?How much does John own‏


Page 25



And You Have $5000 W-2 Income From The S Corp Business Which Was

Entered On Line 1 Of the 1084 Calculator

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91Fannie Mae Cash Flow Analysis Form (Form 1084) Pt Il

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Fannie Mae Cash Flow Analysis Form (Form 1084) Pt II 95

Rate Express

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Desktop

– Only 5 Required Fields

– Find Our MI Rates And Products

And Compare Them To FHA

– Find Previous Quotes With

“Scenario ID”

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From The Results Screen

– Compare Up To 4 Quotes!

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Fannie Mae Cash Flow Analysis Form (Form 1084) Pt II 96


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98


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