Effective April 27, 2015
Correspondent Channel
Service Release Premium
Schedule
Effective April 27, 2015
Refinance and Purchase
10, 15, 20 Year Terms and All ARM's
Loan Amount
$0 - 49,999
$50,000 - 99,999
$100,000 - 149,999
$150,000 - 249,999
$250,000 and greater
Service Release
Premium
-0.500
0.125
0.5
0.625
1
Refinance and Purchase
30 Year Terms
Loan Amount
$0 - 49,999
$50,000 - 99,999
$100,000 - 149,999
$150,000 - 249,999
$250,000 and greater
Service Release
Premium
-0.375
0.375
0.8
1
1.25
Income
Tax Returns
When are Two Years of Federal Tax
Returns Required?
Tax Returns
• Earns 25% or more of his/her income from
commissions;
• Is employed by family members;
• Is employed by interested parties to the
property sale or purchase;
• Receives rental income from an investment
property (only one year required unless meets
one or more of the other conditions in this
list)
Tax Returns
• Receives income from temporary or periodic
employment (or unemployment) or employment
subject to time limits, such as a contract
employee or tradesman;
• Receives income from capital gains, royalties, real
estate, or other miscellaneous non-employment
earnings reported on IRS Form 1099;
• Receives income that cannot otherwise be
verified by an independent and knowledgeable
source;
• Uses foreign income to qualify;
Tax Returns
• Uses interest and dividend income to qualify; or
• Receives income from sole proprietorships,
limited liability companies, partnerships, or
corporations, or any other type of business
structure in which the borrower has a 25% or
greater ownership interest. Borrowers with a
25% or greater ownership interest are considered
self-employed and the file must be documented
and underwritten using the requirements for selfemployed borrowers.
Tax Returns
• Please note: For self-employed
borrowers, FHLMC may allow for
only one year federal tax returns
if the feedback returns
“Streamlined Accept”
documentation requirements.
2014 Tax Returns
Can we use 2014 tax returns if
transcripts are not yet available?
2014 Tax Returns
• If 2014 tax returns are provided but 2014
transcripts are not available yet, document
the 2014 tax returns have been filed (i.e. IRS
confirmation, statement from accountant,
documentation of refund check or tax
payment).
• If the income is less in 2014, use the 2014
figures.
2014 Tax Returns
What are the requirements if the
borrower has not yet filed 2014
tax returns?
2014 Tax Returns
• If tax returns are required for verification of income
and borrowers have not filed the 2014 tax returns yet
(as of 4-15-15), all of the following are required:
– A copy of the IRS Form 4868 (Application for Automatic
Extension of Time to File US Individual Income Tax Return)
filed with the IRS;
– IRS 1040 tax transcripts for the current year (2014)
showing “No Transcripts Available”; and
– Tax returns and transcripts for the prior two years
• The 4506-T should include 2012, 2013, and 2014.
• Profit and loss statements should be obtained.
Self Employment
If a borrower is self-employed and
receives W2 income from the business,
do we need to obtain the business tax
returns?
Do we need to analyze the business if
the W2 income is enough for qualifying?
If the borrower owns 25% or more
• Business tax returns must be obtained
and analyzed for qualifying if primary
source of income.
• W-2 income can be used for qualifying.
• If the business is showing a loss, this loss
must be utilized in the calculation of
income.
If the borrower owns 25% or more
• FNMA does not require that the business returns
be obtained if it is a second job and we are not
using the income to qualify.
• FNMA allows the requirements for business tax
returns to be waived if:
– Personal funds are used for down payment and
closing costs and reserves;
– Borrower has been self-employed for at least 5 years;
and
– Borrower’s individual tax return shows and increase in
self-employment income over the past two years.
If the borrower owns less than 25%
• Business tax returns would not be
required.
• W-2 income can be used for
qualifying.
FNMA Changes
Why wouldn’t we count the loss?
FNMA Changes
• Most second jobs are set up for
intentional losses for tax write-off
purposes.
• If a borrower is losing a lot of money
from a second job, they will likely stop
the activity.
Self Employment
If a borrower owns less than 25% of a
business, what documentation is
required to use that income for
qualifying?
Self Employment
• If the borrower owns less than 25% of a
business but plans to use the business
income, follow the 25% or greater selfemployed documentation requirements.
• The borrower should not be input as selfemployed. The findings will not reflect correct
documentation requirements. Self-employed
documentation must be obtained.
Self Employment
What if someone converts from a
Schedule C to a S-Corp or partnership,
does that change how you underwrite the
income?
Self Employment
• As long as the structure is the
only change and the business
remains the same, follow the
SAM worksheet.
Self Employment
Can I use income from an 1120
Corporation?
Self Employment
• If the borrower owns a C-Corp, the income
can only be utilized if the borrower owns
100%.
• If the C-Corp shows a loss and the borrower
owns 100%, the loss needs to be considered in
the income calculation.
• If the C-Corp experiences a loss and the
borrower does not own 100%, the business
loss does not have to be deducted.
When are Schedule K-1s required?
Schedule K-1s
• If Schedule E indicates the borrower owns a
partnership(s) and/or S-Corp(s), all K-1s must
be obtained to determine the percentage of
ownership in each business. Please note the
Schedule K-1 will be filed with the business tax
returns; however, depending on
circumstances, the entire business tax returns
may not be necessary.
Schedule K-1s
• If a borrower is part of an investment club
with 30 people so they own 1/30th, obtaining
a copy of the K-1 will be sufficient
documentation. The loss would need to be
counted for a file being sold to FHLMC but
would not need to be counted for FNMA
(income could be used in both cases if there is
a 2 year history). No business returns would
be required.
Self Employment
On Schedule F for farm income, isn’t it
redundant to take the bottom line “net”
income and count the ag related loan
payments against the borrower?
The borrower’s net income is written down
by their farm expenses, which is what the ag
loans cover.
It seems like they are getting hit twice. If we
are counting all their debts, why can’t we
use the gross income?
Schedule F
• If you can document the ag debts are
being deducted as expense (other
interest and mortgage interest on
Schedule F) and the ag payments are
being included in all other payments, the
interest portion of the debts can be
added back in the income calculation.
FNMA Changes
Is Merchants Bank honoring FNMA
changes recently published regarding
self employment income?
FNMA Changes
• Self-employed income can be calculated using the
“Traditional Method” as shown on MGIC’s 2015 SAM
worksheet which is located under the Documents tab
on the Landing Page titled “SAM MGIC Worksheet
2015”. We will not be following the “Distribution
Method” and will allow the income that is reported
on lines 1, 2 & 3 of the 1120S K1’s to be utilized and
lines 1, 2, 3 & 4 of the 1065 K1’s to be utilized as we
have in the past. Please follow the instructions as
shown on the SAM worksheet.
FNMA Changes
• Tax returns will not be required for salaried borrowers
who have jobs that typically have unreimbursed 2106
expense such as truck drivers, union workers, etc.,
however they will still be required for commissioned
borrowers.
• Tax returns will not be required for 2nd jobs where the
income is not being utilized for qualifying. If the tax
returns are provided for other reasons (rental income,
etc.) and there is a 2nd job self-employed loss or 2106
expense shown, those items will need to be included in
the income calculation and cannot be ignored.
FHLMC Changes
• The self-employed guidelines for Freddie Mac
have not changed.
• Please continue to utilize the “Traditional Method” as
shown on the MGIC SAM worksheet. We will still require
tax returns for self-employed 2nd jobs whether the
income is being utilized or not, and tax returns will need
to be provided if the borrower is employed in a line of
work where unreimbursed expenses are typical
(commissioned employees, truck drives, union workers,
etc.).
Self Employment
Can you reiterate if I need to deduct
2106 expenses for a salaried
borrower?
2106 Expenses
• FNMA files only: Tax returns are only required
for self-employed borrowers and those
borrowers earning 25% or more in
commission income.
• FHLMC files only: Tax returns will be required
for all positions in which 2106 expenses may
be applicable (truck drivers, etc.) and must be
deducted from income.
Rental Income
How do I calculate rental income?
Rental Income
• There are three rental income worksheets located
on the Merchants Bank landing page under
“Documents” which are fillable. They include
Rental Income Worksheet Not Subject Property,
Rental Income Worksheet Subject Property Not
Primary Residence, and Rental Income Worksheet
Subject Property Primary Residence 2-4 Family.
• Use the appropriate worksheet for the type of
property you are determining rental income.
• New MGIC SAM also includes rental worksheets.
FNMA or FHLMC?
If I have a self employed borrower,
how do I know if it is best to go FNMA
or FHLMC?
FNMA or FHLMC?
• FHLMC may offer “Streamlined Accept”
documentation and only one year of tax returns
may be required for a self-employed borrower.
• FNMA if you have rental income with less than
two years experience managing rental properties.
• FNMA if they have a second job with a loss or a
salaried job that usually has 2106 expenses.
• FHLMC if non-occupant co-borrower and need to
use income.
FNMA or FHLMC?
• FHLMC if employed by family member but
haven’t worked for family for two years as
they do not require a two-year history
• FHLMC if contract employment (refer to
Mortgage Bulletin 2014-10 for details)
Self Employment
• When personal or business tax returns
are required, please provide complete tax
returns, including all schedules,
statements, and Form W-2s (whether
using the income for qualifying or not).
Self Employment
Will Merchants Bank accept a SAM
worksheet for Fannie Mae loans instead
of a 1084 or similar form?
What form/worksheet do the
underwriters use to calculate income?
Self Employment
• Merchants Bank underwriters use the MGIC
SAM worksheet.
• SAM worksheets are uploaded to the file and
labeled “U/W notes” or “SAM worksheet”.
• Any industry standard forms utilized by the
investors and/or the MI companies can be
used.
Self Employed Verbal VOE
How do I properly document a Self
Employed verbal verification of
employment?
Self Employed Verbal VOE
• The existence of the borrower’s business must be
verified within 30 calendar days prior to the note date
by a third party, such as:
– CPA
– Regulatory agency
– Applicable licensing bureau
Or a phone listing and address for the borrower’s business
can be verified using a telephone book, the Internet, or
directory assistance.
• The source of the information obtained and the name
and title of the employee who obtained the
information must be documented.
Self Employed Verbal VOE
• Whenever possible, best practice would be to
use an official State website (see below) to
verify the existence of a business.
•
•
•
•
Minnesota: https://mblsportal.sos.state.mn.us/
North Dakota: https://apps.nd.gov/sc/busnsrch/busnSearch.htm
Wisconsin: https://www.wdfi.org/apps/CorpSearch/Search.aspx
Iowa:
http://sos.iowa.gov/search/business/(S(u1acvv55o2m2uhrqhtbxbi
45))/search.aspx
• South Dakota: https://sos.sd.gov/business/search.aspx
• Illinois: http://www.cyberdriveillinois.com/departments/business
services/corp.html
“Grossing Up” Income
What type of income can be
“grossed up”?
What documentation is required?
“Grossing Up” Income
• Certain types of non-taxable income (social
security benefits, child support payments, and
certain types of public assistance payments) can
be adjusted upwards.
• Must verify the income is non-taxable using
documentation such as:
–
–
–
–
Tax returns (social security)
Award letters
Account statements
Any other documentation that addresses the nontaxable status
“Grossing Up” Income
• If non-taxable and income and tax-exempt
status are likely to continue, you may “gross
up” the income and use 125% of the nontaxable amount.
Social Security Income
How can I verify social security?
When do I need Form SSA 3288?
Social Security Income
• Two months bank statements; or
• Copy of Social Security Administration award
letter
Form SSA-3288 is necessary at closing if using
Social Security income.
Variable Income
What do you mean by
'variable' income?
Variable Income
• Hourly workers with fluctuating hours (i.e. nurse,
construction, railroad workers, etc.)
• Also includes income such as commissions,
bonuses, and/or overtime
• If the income must be averaged, it is a key
indicator that it is variable income
• Two or more years of receipt is recommended;
however, 12 to 24 months may be acceptable as
long as borrower’s loan application demonstrates
positive factors that offset the shorter history
Variable Income (cont.)
• Employed at job with
variable hours less than
12 months is not
acceptable
• Example shown
Commission Income Example 1
YTD 2015 (3/15/15)
2014
2013
Annual
$16,000
$60,000
$62,000
Monthly
$6,451.61
$5,000
$5,166.67
Commission income decreased slightly from 2013 to 2014 and
has increased YTD 2015; therefore commission income is
relatively stable, and a 24 month average of 2013 and 2014
would be most conservative and should be utilized.
Commission Income Example 2
YTD 2015 (3/15/15)
2014
2013
Annual
$9,000
$60,000
$62,000
Monthly
$3,629.03
$5,000
$5,166.67
Commission income has steadily decreased. A letter of
explanation for the significant decrease in YTD commissions
must be obtained to utilize the commission income. (i.e. slow
time of year for sales) If letter of explanation is obtained, the
2015 commission income ( most conservative) should be utilized.
Seasonal Income
How can I verify seasonal income?
What documentation is required?
Seasonal Income
• Income that is earned during a certain time of year (i.e.
construction workers, farm hands, etc.) is considered
seasonal.
• Must be in the same job or same line of seasonal work
for the past two years.
• Must confirm with borrower’s employer there is a
reasonable expectation that he/she will return to their
position next season.
• Unemployment (if used for qualifying) must be
appropriately documented (2 years tax returns and
document year-to-date receipt of unemployment
income).
Variable/Seasonal Income
If a person switches jobs and pay
changes from W-2 income to another
source of income such as commission
or a seasonal job, can any of the
income be used?
Variable/Seasonal Income
• The borrower must meet the investor
guidelines regarding a 2 year history receipt of
variable income.
• If the borrower is switching to strictly
commission or seasonal income, this would
not meet the guidelines.
• However, if the borrower receives a base
salary, this may be able to be utilized.
An Important Note About
the Seminar Contents
While every effort has been made to insure
the reliability of the session contents, FNMA
and FHLMC Selling and Servicing Guides and
updates including announcements and
release notes are the official statements of
FNMA and FHLMC policies and procedures
and will control in the event of discrepancies
between information in this seminar and the
guides.