Wednesday, July 1, 2015

"I Need Income Computation Training" means I don't understand self-employment

Changes to FNMA 1084 and Rental Income Computation Create Frustration

4 Months After SEL-2014-16, Confusion Persists

When a processor with more than 2 years of experience reports that he or she needs help computing income, fight the instinct to say "we need more training on income computation" and break out the elementary initial training material. What his or her statement expresses reflects the frustration of submitting a case to an underwriter after 45 days of processing only to have the file rejected for insufficient income. Clearly a bad day.

While you might expect this result from a rookie loan officer or processor, income computation worksheets have all but eliminated the problem for hourly or salaried borrowers; what remains is the self-employed and the uncertainty of rental income computation. This is because many processors and underwriters have not begun using the new forms. This may be due to the fact that Freddie Mac hasn't changed its online Form 91. In addition, internal policy may dictate the use of specific calculations that are MORE conservative that Fannie Mae's forms allow.

Please note that the changes required in SEL-2014-16 were effective 4/1, but then tabled until further notice by Selling Notice 3/24.  This article is not about the FNMA guidelines specifically but to point out the tools which are available for use in analyzing self-employed borrowers. 

FNMA 1084 Changes Not Fully Appreciated

The reality is that FNMA made major changes to the self-employment computation in its 1084 process. FNMA, as of January, no longer really endorses the Adjusted Gross Income Method of income computation, and has morphed the Schedule Analysis Method (1084) into a "Cash Flow Analysis Method." What's more, once you complete that analysis, you now need to evaluate the stability of that income using a "Comparative Income Analysis" form which reviews income over a period of time. According to Michael Whitbeck of, the new process significantly changes qualifying for 1065 Partnership and S-Corporation principals.

The good news is that the underwriting industry has provided some free tools to help with this process.  You simply need to understand the variations.

FNMA 1084

The Fannie Mae form doesn't provide a form filler or calculator mode, so you stand the chance of making a math error on top of perhaps incorrectly attributing income.
Fannie mae income computation for self-employed borrowers provides line-by-line instruction
You should include the income computation in each file. This serves as the basis for discussion as to what an underwriter feels he or she must change.

"Standardized" 1084 Format Provided by Radian MI

Radian has taken the time to provide the Fannie Mae form in Excel format. This means that it will make the calculations for you. You can also see the impact of "what if" scenarios.

In addition to doing the math, the Radian Form provides prompts for sourcing the information from the tax return. 

The Radian form also provides a simple Rental Income Worksheet which takes into consideration new rules for subject property and other property rental calculations meeting FNMA guidelines.

MGIC Worksheet Provides Augmented Instruction

MGIC lists two different worksheets - an AGI (Adjusted Gross Income) method and SAM (Schedule Analysis Method). However, they refer to both as a "Cash Flow Analysis." This can confuse the individual trying to source a FNMA Cash Flow Analysis.  The AGI version seems to be closer to the FNMA 1084.

Freddie Mac is still an Option

Loans which do not meet the new criteria for Fannie Mae should be scrubbed against Freddie Mac's guidelines to determine if they are eligible as FHLMC still uses form 91 which still uses traditional calculations.

Fannie Mae Comparative Income Analysis

In addition to the income calculations required by the Cash Flow Analysis, the underwriter must perform a second analysis of the stability of the income.  If the income is decreasing, underwriting may require that the lower of two years be utilized, or may disallow the self-employment income entirely.

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