Fannie Mae Updates Underwriting Rules for Self-Employed Income

• December 16, 2014
• Anna DeSimone

By Anna DeSimone, President

December16, 2014, Fannie Mae issued Selling Guide Announcement SEL-2014-16.  The Selling Guide has been updated to include changes to the following:

• Self-Employed Income
• Servicing Execution Tool
•  Solar Panels
• Adjustments to Comparable Sales
• Flood Insurance for Nonresidential Detached Structures
• Cure Provision for Points and Fees
• Payment Calculation for Student Loans
• Nonstandard Repayment Plans
• Incorporation of Selling Guide Announcement SEL-2014-14, Lender Selling Representations and Warranties Framework Update
• ARM Plan Update
• Miscellaneous Selling Guide Updates

The update related to Self-Employed income is described below.  Please refer to the Fannie Mae Announcement for important information concerning the other topics listed.  Fannie Mae conducted a comprehensive review of policies related to self-employment income and the Cash Flow Analysis (Form 1084).  Through this review, Fannie Mae determined that lenders are not consistently applying certain self-employed income policies, and a number of policies were in need of clarification. As a result, the Selling Guide has been updated to provide additional clarity, with a goal of increased consistency in the application of those policies. Notable changes include (but are not limited to):

• Analysis of Borrower’s Personal Income – Clarified that a lender is not required to prepare a written evaluation of self-employment income when the borrower is qualified using only salaried income and self- employment is a separate and secondary source of income (or loss).

• Analysis of Borrower’s Business Income – Clarified that a lender is required to perform an analysis of a borrower’s business income when a borrower is relying on it to qualify and the requirements that permit the lender to waive business tax returns are not met.

• Business income reported for a borrower on Schedule K-1 (IRS Forms1065 or 1120S)

• Clarified that Schedule K-1 for the most recent two years is required when using business income to qualify.

• Clarified that business income may be used in qualifying the borrower only when there is a history of income distribution to the borrower consistent with the level being used to qualify.

• Expanded the reference to ordinary income to include net rental real estate income and other net rental income reported on Schedule K-1.

• Income Verification for Self-Employed Co-Borrowers – Provided additional guidance regarding the documentation required.

• Use of Business Assets – Provided guidance regarding the documentation that may be necessary to confirm that the withdrawal of funds will not have a negative impact on the business.

• Fannie Mae Cash Flow Analysis (Form 1084) – Revised to reflect policy clarifications and align with IRS tax forms and terminology.

Updated Selling Guide Topics

• B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower

• B3-3.2-02, Business Structures

• B3-3.2.1-08, Income or Loss Reported on IRS Form 1065 or 1120S, Schedule K-1

• B3-3.2.2-01, Analyzing Partnership Returns for a Partnership or LLC

• B3-3.2.2-02, Analyzing Returns for an S Corporation

Effective Date
Lenders may implement these changes immediately but must do so for applications dated on or after April 1, 2015.

, Fannie Mae, Mortgage Lending, Real Estate Lending | Comments Off on Fannie Mae Updates Underwriting Rules for Self-Employed Income