Update on Self-Employment Income Analysis for Conventional Loans
Dear Licensed Partner,
Fannie Mae announcement SEL 2015-09 clarified and updated the requirements on analysis and verification of qualifying income for self-employed borrowers.
Effective for all conventional loans with application dates on or after February 1, 2016, Sun West will require the following documentation when business income is reported on Schedule K1 and used for qualification:
A) Income Documents
- Most recent two years individual tax returns (Form 1040) with all schedules
- Most recent two years business tax returns - with Schedule K-1
- Form 1065 for Partnerships/LLCs
- Form 1120S for S-Corporations/LLCs
B) Use of Self-employment income from Partnership or S Corporation business
- Ordinary income, net rental real estate income, and other net rental income reported on Schedule K-1 may be included in the borrower’s cash flow provided:
- the borrower can document ownership share (using Schedule K-1); and
- the borrower can document access to the income (such as a partnership agreement or corporate resolution); and
- the business has adequate liquidity to support the withdrawal of earnings
| If | Then |
| Schedule K-1 reflects a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify |
No further documentation required |
| Schedule K-1 does not reflect a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify |
Proof that Borrower has access to the income (including but not limited to partnership agreement or corporate resolution) will be required
Additional documentation will be required, such as several months of recent business asset statements and/or current balance sheet to verify that the business has adequate liquidity to support the withdrawal of earnings
|
| Guaranteed payments to the partner from a partnership or an LLC are to be included in borrower's cash flow |
Schedule K-1 showing the borrower has a two-year history of receiving such income is required |
Note: Additional documents to confirm access to the income will not be required if borrower(s) own 100% of the business.
C) Income Verification for Self-Employed Co-Borrowers
| If | Then |
| Income will NOT be used for qualifying purposes |
Business-related income documents NOT required |
| No meaningful business loss is determined from individual tax returns |
No additional documentation required |
| Meaningful business loss is determined from individual tax returns |
Salaried income used to qualify will be reduced by the amount of reported loss and additional income documentation may be required to determine the impact on qualifying income |
Guidelines & rate sheets for the Correspondent channel can be accessed here.
Guidelines & rate sheets for Wholesale and Hybrid Correspondent channels can be accessed here.
If you have any questions, please contact your Client Relations Manager at (855) OK-SUNWEST or (855) 657-8693.
Sincerely,
Sun West Mortgage Company, Inc.
18000 Studebaker Road, Suite 200
Cerritos, CA 90703
Phone: (800) 453-7884 |
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This information is provided to licensed brokers/lenders only and may not be copied or distributed to customers or potential customers. All loans are subject to approval. Certain restrictions may apply. Listed pricing is a morning indication only. Program rates, prices, guidelines, fees, costs, terms and conditions are subject to change without notice.
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