02/10/2016
20
14
TAX YEAR
EVALUATING the
Self-Employed Borrower
and other sources of income
Adjusted Gross Income Method (AGI)
1
02/10/2016
Legal Disclaimer
The information presented in these training materials is for general information
only, and is based on guidelines and practices generally accepted within the
mortgage finance industry and is not intended to be all-inclusive. MGIC makes no
representations or warranties of any kind with respect to the accuracy,
completeness or suitability for any purpose of the information contained in this
training.
MGIC expressly disclaims any and all warranties, express or implied, including
without limitation warranties of merchantability and fitness for a particular
purpose regarding these materials and our training program. In no event will
MGIC be liable for any direct, indirect, incidental, punitive or consequential
damages of any kind with respect the training or materials provided.
All examples are hypothetical and are for illustrative purposes only. Our training
is not intended and should not be interpreted or relied upon as legal advice. We
encourage you to seek advice from a qualified professional.
2
2
02/10/2016
Objectives
 Reminders!
 Review
cash flow analysis concepts and business
structures
 Convert
tax entries into cash flow:
− Review 1040s with accompanying schedules
 Rental income analysis
 Complete AGI
cash flow method using Borrower personal
tax returns
3
3
02/10/2016
Reminders!
 For
lower risk loans, next DU® release may allow for only
most recent year of individual & business tax returns
 Use
of Partnerships and S Corp business income
 Updated
how to calculate and document SEB income
 Completion
of Form 1084 only required for self-employed
borrowers
 Revised
Fannie Mae Form 1084
4
4
02/10/2016
New Form 1084
What’s new…
Individual 1040 section:
Analysis is limited to these
income sources
5
5
02/10/2016
New Form 1084

Does not assist in analysis of “non self-employed income”,
for example:
• commission income/2106 expenses
• interest/dividend income
• alimony
►

However, Fannie Mae still requires analysis
As in the past, Fannie Mae allows the use of other cash-flow
analysis forms
6
6
02/10/2016
Reminders!
.
7
7
02/10/2016
Taxable Income vs. Cash Flow
Taxable Income
Cash Flow Income
8
8
02/10/2016
Non-cash Expense

Expenses deducted from cash flow that do not
require an actual cash payment

3 types of ‘Non-cash’ expenses
– Depreciation
– Depletion
– Amortization

Non-cash expense can be added back to cash flow
if included in total expenses

Form 2106, Schedule C, E, F & business returns
9
9
02/10/2016
Recurring
Income & Expense
Nonrecurring
Income & Expense
Income:
Expected to continue
3 or more years
Income:
One-time occurrence
(e.g., sale of an
asset, prize)
Expense:
Day-to-day cost of
business operations
Expense:
Extraordinary onetime occurrence
(e.g., casualty loss)
10
10
02/10/2016
Business Structures
Sole
Proprietorship
• Schedule C
• Note: In some
instances an LLC
may be filed with
Schedule C
Partnership
• Form 1065
e.g. General,
Limited & Limited
Liability
• K-1 (Form 1065),
e.g. General,
Limited & Limited
Liability Company
Corporation
• S Corporation –
Form 1120S
• K-1 (Form 1120S)
and/or W-2
• Corporation –
Form 1120 & W-2
11
11
02/10/2016
Cash Flow Analysis –
AGI Method
Adjusted Gross Income
Alternative Method:
Schedule Analysis
Method (SAM)
12
12
02/10/2016
Cash Flow Analysis –
AGI Method
13
13
02/10/2016
Cash Flow Analysis –
AGI Method
14
14
02/10/2016
Cash Flow Analysis –
AGI Method
15
15
02/10/2016
John and Ginny Borrower – 1003 Summary
Jointly
John
Ginny
• Married with no dependents
• Own three rental properties
• Sole proprietor of Up & Running computer
service
• 20% partner in Tanglewood Realty
• 50% owner of Creative Network Design
Services, an S Corporation; he does not take
an active part in management
• 50% owner of Westchester Development,
LLC
• 100% owner and manager of Interior
Innovations Incorporated, a regular
corporation
• Part-time sales rep for Creative Greeting
Cards
• 50% owner of Westchester Development,
LLC
16
16
02/10/2016
John and Ginny Borrower – 1003 Summary
Jointly
• Married with no dependents
• Own three rental properties – Schedule E
John
• Sole proprietor of Up & Running computer
service – Schedule C
Ginny
• 100% owner and manager of Interior
Innovations Incorporated, a regular
corporation – SEB W-2 Income
• Part-time sales rep for Creative Greeting
Cards – W-2 Income and Form 2106
17
17
02/10/2016
Case Study pg. 3
Form 1040
18
18
02/10/2016
Case Study pg. 3 Manual pg. 1-3
Form 1040
19
19
02/10/2016
Form 1040
20
20
02/10/2016
Case Study pg. 1 Manual pg. 1-3
Form W-2
21
21
02/10/2016
Case Study pg. 2 Manual pg. 1-3
Form W-2
22
22
02/10/2016
Section I, Form 1040 – Page 1
Effect on Cash Flow Analysis
23
23
02/10/2016
Section I, Form 1040 – Page 1
Effect on Cash Flow Analysis
24
24
02/10/2016
Case Study pg. 3 Manual pg. 1-5
Form 1040
Savings/CD’s
Stocks/mutual funds
Divorce decree
i.e., Seasonal work?
i.e., Consulting/contract
25
25
02/10/2016
Section I, Form 1040 – Page 1
Effect on Cash Flow Analysis
26
26
02/10/2016
Case Study pg. 4 Manual pg. 1-11
Form 1040, page 2
4506-T to validate income via the IRS
27
27
02/10/2016
Case Study pg. 5 Manual pg. 1-17
Schedule A
28
28
02/10/2016
Case Study pg.6 Manual pg. 1-19
Form 2106
$5,300
29
29
02/10/2016
Section II, Form 2106
Effect on Cash Flow Analysis
30
30
02/10/2016
Case Study pg. 7 Manual pg. 1-21
Form 2106, page 2
Business
miles (Line 13)
x Mileage rate
a
Actual
depreciation
expense
a
31
31
02/10/2016
Section II, Form 2106
Effect on Cash Flow Analysis
32
32
02/10/2016
Case Study pg. 3 Manual pg. 1-13 & 1-23
Form 1040
Case Study pg. 49
Compare 2013 to 2014
33
33
02/10/2016
Section III, Schedule B
Effect on Cash Flow Analysis
34
34
02/10/2016
Effect on Cash Flow Analysis
35
35
02/10/2016
Case Study pg. 8 Manual pg. 1-25
Schedule C
36
36
02/10/2016
Case Study pg. 8 Manual pg. 1-25 & 1-27
Schedule C
37
37
02/10/2016
Case Study pg. 9 Manual pg. 1-29
Schedule C,
page 2
Business miles x
Depreciation Factor
a
Amortization or Casualty Loss
38
38
02/10/2016
Section IV, Schedule C
Effect on Cash Flow Analysis
39
39
02/10/2016
Case Study pg. 10 Manual pg. 1-33
Schedule D
Follow
2-year history
your needed
Guidelines
to use income or loss
Follow your Guidelines
Case Study pg. 57
Compare 2013 to 2014
40
40
02/10/2016
Case Study pg. 12 Manual pg. 1-39
Form 8949
41
41
02/10/2016
Section V, Schedule D
Effect on Cash Flow Analysis
42
42
02/10/2016
Case Study pg. 13 Manual pg. 1-45
Schedule E
PITIA Method
Verify mortgage payment:
-credit report
-monthly or year-end statement
Verify HOA dues, flood insurance, etc… with statements
43
43
02/10/2016
Effect on 1003; REO Section
44
44
02/10/2016
Case Study pg. 13 Manual pg. 1-45
Schedule E
Standard Method
45
45
02/10/2016
Effect on 1003; REO Section
46
46
02/10/2016
Cash Flow Analysis Summary
47
47
02/10/2016
Purpose of Cash Flow Analysis
Verify qualifying income that is:
48
48
02/10/2016
Summary

Identified common income sources

Discussed taxable income vs. cash flow

Defined key business structures

Analyzed personal tax returns of self-employed
borrower(s)

Completed cash flow analysis
49
49
02/10/2016
www.mgic.com/seb2014
www.mgic.com
50
50
02/10/2016
Editable Cash Flow Forms
www.mgic.com/seb2014
NEED HELP? Line-by-line instructions link manual.
Automatically
Calculates Totals
51
51
02/10/2016
Follow Us!
Twitter: mgic.com/twitter
MGIC Connects Blog: mgic-connects.com
LinkedIn: mgic.com/linkedin
YouTube: mgic.com/youtube
52
52
02/10/2016
20
14
TAX YEAR
Thank You
for choosing MGIC
www.mgic.com
53