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Effective April 27, 2015Correspondent Channel

Service Release Premium ScheduleEffective April 27, 2015

Refinance and Purchase  10, 15, 20 Year Terms and All ARM's  

Loan Amount Service Release Premium

$0 - 49,999 -0.500$50,000 - 99,999 0.125

$100,000 - 149,999 0.5$150,000 - 249,999 0.625

$250,000 and greater 1

Refinance and Purchase  30 Year Terms  

Loan Amount Service Release Premium

$0 - 49,999 -0.375$50,000 - 99,999 0.375

$100,000 - 149,999 0.8$150,000 - 249,999 1

$250,000 and greater 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 self-employed 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 self-employed documentation requirements.

• The borrower should not be input as self-employed.  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 EmploymentOn 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 bureauOr 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(u1acvv55o2m2uhrqhtbxbi45))/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 non-taxable 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 non-taxable 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.