16-05: Fannie Mae SEL 2014-16 and 2015-09: Self-Employed Income Calculation

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February 01, 2016

Effective with applications taken on or after February 1, 2016, for all DU approved conventional loans, PennyMac is aligning with Fannie Mae’s updated self-employment income policies relating to 1065 partnerships and 1120-S corps.

 

Per Fannie Mae B3-3.2.2:

Business income may only be used to qualify the borrower if the lender obtains documentation verifying that

    • the borrower has ownership of the income (Schedule K-1 may be used to document ownership share), and
    • the income was actually distributed to the borrower.

Alternatively, the lender can obtain documentation verifying that

    • the borrower has access to the income through a corporate resolution or other documentation that the lender determines is appropriate—unless the borrower(s) own 100% of the business, in which case confirmation of access to the income is not required; and
    • the business has adequate liquidity to support the withdrawal of earnings.

 

Business income* should be calculated based on the number of years of tax returns required by DU:

  • If DU requires one year of tax returns, the lesser of business income or distributions should be used for qualifying income.
  • If DU requires two years, and the business income is decreasing, then the qualifying income should be the lesser of the current year business income or current year distributions.
  • If DU requires two years, and the business income is the same or increasing, then
    • A) Calculate the business income based on the most recent 24 months,
    • B) Average the distributions over the same 24 months,
      • If the current year distributions are $0, the borrower will need to demonstrate access to the income and business liquidity.
  • The qualifying income should be the lesser of A or B.

 

*Business income includes all adjustments that would normally be required to calculate self-employed income.  Distributions are the amount of money the borrower actually received from the business, as documented on the K-1.

 

Examples: Green indicates amount that should be used to qualify.  All examples assume two years tax returns are required.

 

2013

2014

Income Used to Qualify

Income

$20,000

$15,000

$15,000/12 = $1,250

Distribution

$10,000

$5,000

$5,000/12 = $416

 

 

 

 

Income

$20,000

$15,000

$15,000/12 = $1250

Distribution

$5,000

$10,000

$10,000/12 = $833

 

 

 

 

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$10,000

$5,000

$15,000/24 = $625

 

 

 

 

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$17,000

$23,000

$40,000/24 = $1,666

 

 

 

 

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

0

0

$0/24 = $0

 

 

 

 

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

0

$10,000

$10,000/24 = $416

 

 

 

 

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$25,000

0

$0/24 = $0

 

If distributions are insufficient to support the business income, the following alternative approach may be used:

The business income may be used to qualify if both “1” and “2” are met:

1.  Document the borrower’s access to the business funds via:

    • 100% ownership,
    • A partnership agreement indicating access,
    • A corporate resolution indicating access, or
    • Other documentation determined to be appropriate.

2.  The business has adequate liquidity to support the withdrawal.

    • Liquidity is defined as documented liquid business assets less business liabilities.

 

 

Please contact your Sales Representative with any questions.