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Underwriting for Self-Employed Borrowers

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

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Underwriting for Self-Employed Borrowers

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  1. Underwriting for Self-Employed Borrowers Presented by: Blaine Rada Customer Training Manager CMG Mortgage Insurance Company blaine.rada@cmgmi.com

  2. 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

  3. When You Need Tax Returns • Self-Employment • Commission Income • Unreimbursed Expenses • Rental Income • Member works for his/her family

  4. 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)

  5. Farming Income • Net income is found on pg. 1 of the 1040 (line 18) • Schedule F • Add Depreciation (+): line 16

  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)

  10. 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?

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