10/21/2014
Tax Return Review Using Form 91
Case Study Part 1
©2012 Genworth Financial, Inc. All rights reserved.
Objective
Understand the meaning of “Self Employed”
‫‏‬
Learn to use Freddie Mac’s Form 91 to calculate supportable
income 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
SEB-Form 91
SEBForm 91
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IRS Form 4506-t
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.
®Desktop Underwriter is a registered trademark of FannieMae
www.irs.gov
SEB-Form 91
SEB2
Form 91
Sample 4506t results
SEB-Form 91
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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
SEB-Form 91
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Does your borrower own 25% or more
of a business?
Does checking the Self Employed Indicator to yesincrease the risk of the loan when evaluated by LP?
SEB-Form 91
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Self Employed Indicator
SEB-Form 91
Does your borrower own 25% or more
of a business?
Does checking the Self Employed Indicator to yesincrease the risk of the loan when evaluated by DU?
No
Yes
SEB-Form 91
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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
Form 91
SEB-Form 91
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Income Analysis Form 91
Are any W2 wages filed? If yes, does the
borrower own more than 25% of the entity
that issued the W2?
SEBForm 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
SEB-Form 91
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Income Analysis Form 91
Individual Tax Return (1040)
1. W-2 Income from SE
2011
Is Mary Self Employed?
Page 2
SEBForm 91
Income Analysis Form 91
Individual Tax Return (1040)
1. W-2 Income from SE
Page 13
2011
When a Borrower files a K1 it must be reviewed for % of ownership and
potential losses!
SEB-Form 91
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1120S K1
Page 35
SEB-Form 91
Income Analysis Form 91
74,700
Page 2
SEB-Form 91
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Income Analysis Form 91
Check Schedule A to see if a #2106 form has been
completed by the borrower.
SEB-Form 91
Analyzing Reports Employment & Income
Income Trending
‫‏‬
– After the monthly year-to-date income amount is calculated, it must be compared to prior
years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a
standard Verification of Employment completed by the lender or third-party employment
verification vendor)
• If the trend in the amount of income is stable or increasing, the income amount should be averaged
• If the trend was declining, but has since stabilized and there is no reason to believe that the borrower
will not continue to be employed at the current level, the current, lower amount of variable income
must be used
• If the trend is declining, the income may not be stable. Additional analysis must be conducted to
determine if any variable income should be used, but in no instance may it be averaged over the
period when the declination occurred
DU 9.0 Updated message for Employment
How to Become A Desktop Underwriter June 2013
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Did Your Borrower file a Schedule A?
Review Line 40 Entry vs. Standard Deduction Values on Page 2 of 1040
‫‏‬
Page 4
SEBForm 91
Schedule A Expenses
When a 2106 Worksheet has
been completed you must
review it for total expenses
declared!
Page 5
SEB-Form 91
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2106 Worksheet
Line 8 (a+b)= Total Expenses
Page 15
SEB-Form 91
Income Analysis Form 91
15,355
2. Form 2106-Employee Business Expenses
Total Expenses
Depreciation
(-) 15,355
(+)
0
SEB-Form 91
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2106 Worksheet for Mary’s W-2 Wage
Page 16
SEB-Form 91
Depreciation Factor
SEB-Form 91
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Income Analysis Form 91
15,355
2. Form 2106-Employee Business Expenses
Total Expenses
Depreciation
(-) 15,355
(+)
0
12,455
.22
2,740
12,615
SEB-Form 91
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.
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‫‏‬
‫‏‬
‫‏‬
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2106 Expenses
Nonreimbursed Employee Expenses
W hen 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.
‫‏‬
‫‏‬
2014 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)
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Income Analysis Form 91
2011
SEB-Form 91
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Schedule C Sole Proprietor
Page 7
SEB-Form 91
Income Analysis Form 91
2011
24,040
SEB-Form 91
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Schedule C Sole Proprietor
Is “Other Income” Regular & Reoccurring?
Is a Gas or Fuel Credit?
Page 7
SEBForm 91
Income Analysis Form 91
2011
24,040
2,876
SEB-Form 91
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Schedule C Sole Proprietor Part II
Page 7
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
SEB-Form 91
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Schedule C Sole Proprietor Part II
4562 or page 2 part IV of
Schedule C
Start with what is on line 13
first, if no ratio issue…move on!
Page 7
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
SEB-Form 91
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Schedule C page 2
Business miles from 44a (13,863) x .22 cents (depreciation factor)
= $3,049 in depreciation!
Page 8
SEB-Form 91
Form 4562 page 1
Page 19
SEB-Form 91
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Form 4562 page 2
Page 20
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
13,863
.22
3,049
SEB-Form 91
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Schedule C Sole Proprietor Part II
Page 7
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
3,050
13,863
.22
3,049
SEB-Form 91
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Schedule C
Part V Casualty Losses & Amortization are added back to qualifying income!
Page 8
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
3,050
1,471
13,863
.22
3,049
SEB-Form 91
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Schedule C Sole Proprietor Part II
See internal and/or Investor guidelines for use of Business Use of Home
Page 7
SEB-Form 91
Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
3,050
1,471
2,825
13,863
.22
3,049
SEB-Form 91
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Income Analysis Form 91
2011
24,040
2,876
N/A
4,877
3,050
1,471
2,825
13,863
.22
3,049
30,336
SEB-Form 91
Income Analysis Form 91
SEB-Form 91
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Schedule D
Page 9
SEB-Form 91
Schedule D
$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?
Page 10
SEB-Form 91
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#6252 Installment Sale
Schedule D
Taxable Income $_______
#4797 Sales Business Property
4797 may report onto
Sch.D or directly to 1040!
1040
Line 13 Capital Gain/Loss
Sch.D $_________
Line 14 OtherGain/Loss #4797
$_________
SEB-Form 91
Form 4797
No Example in Case Study
SEB-Form 91
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Form 6252
No Example in Case Study
SEB-Form 91
Income Analysis Form 91
Line 6
SEB-Form 91
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Income Analysis Form 91
SEB-Form 91
Schedule E- Rental
Page 12
SEB-Form 91
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Income Analysis Form 91
18,600
Line7
SEB-Form 91
Schedule E- Rental
Page 12
SEB-Form 91
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Income Analysis Form 91
18,600
27,454
Line7
SEB-Form 91
Schedule E- Rental
Page 12
SEB-Form 91
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Income Analysis Form 91
18,600
27,454
11,168
Line7
SEB-Form 91
Schedule E- Rental
Page 12
SEB-Form 91
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Income Analysis Form 91
18,600
27,454
11,168
14,166
Line7
SEB-Form 91
Income Analysis Form 91
18,600
27,454
11,168
14,166
16,480
16,480
1,373
1,679
-305
SEB-Form 91
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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
Page 3
SEB Form 1084 Part I
64
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
-$7,557
=$1,334 tax exempt
=$1,334 x 125%= $1,667
$9,224 total income
Page 3
SEB Form 1084 Part I
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Freddie Mac Form 90 Verbal Verification of
Employment
http://freddiemac.com/learn/qr.htm
l
SEB66
Form 91
SEB-Form 91
www.mortgageinsurance.genworth.com
SEB-Form 91
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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.
‫‏‬
‫‏‬
©2012 Genworth Financial, Inc. All rights reserved.
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