Written By: Glenn Michaels, Op-Ed Writer
All mortgage loan programs except for Streamline Refinance Programs require the borrower’s Internal Revenue Service (IRS) tax forms that were filed for at least the last or the last two years. If a borrower was self – employed we not only need the borrower’s personal tax returns we also need the most recent two years of business returns.
When reviewing business returns you may require a year to date audited Profit and Loss (P & L) statement and balance sheet.
When an underwriter reviews personal tax returns always begin with page one of the tax return. This page contains information that tells the underwriter a ot of information. The personal information in the tax return could differ from the loan application. The address of the borrower, the number of dependents, the social security number could be in error and the family makeup could also differ from the loan application.
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After the personal information from line one to line 22 gives the underwriter more insight of the borrower’s income. The first line is reserved for wages. If the wages shown does not match the income shown on the Uniform Residential Loan Application you have a potential “red flag”.
Review the dividend and interest income shown, if any. Also review if the income is taxable or non – taxable. If the borrower’s bank statements show a significant amount of funds in the bank accounts and the borrower’s Schedule “B” and/or interest and dividend income is minute then it is a good chance that some or all of the funds in the bank accounts are either gifted or new money. This of course requires more investigation by the underwriter.
Many mortgage loan originators and mortgage loan processors when they see social security income that the social security income is automatically tax free income. If you examine most of the tax returns only a portion is tax free depending on the borrowers age and income. There are most social security recipients either receive Social Security Disability Insurance (SSDI) or Social Security Administration (SSA) income. borrowers receiving SSDI has tax free income. Tax free income can be grossed up. Borrowers receiving SSA that are under the age of 66 years of age may have some or all of their SSA income taxed. In 2015 borrowers under the age of 66 can earn $15,720.00 without a social security penalty. Borrowers 66 years of age or more can earn any amount without penalty. Review the borrowers IRS form 1040 to see how much of the social security income was taxed and not taxed. If an underwriter wants to utilize tax free income look at the tax return to see how much was tax free.
When examining page two of the borrowers IRS 1040 check to see if the borrower filed using the standard or the itemized deduction. A tax payer has a choice to file either way. If a tax payer decides to go with the standard deduction and the tax payer files a tax form 1040 there should not be any deductions on a Schedule “A” since the Standard Deductions was selected. If a tax payer files using the Itemized Deduction, examine Schedule “A” and any other schedules to determine if the inome has items to be deducted or added to the borrowers’ income.
Borrowers sometime omit the fact that they are self – employed, or they file on their Schedule “A” unreimbursed business expenses. Review the tax return and make the proper income adjustment predicated on what is on the tax return.
When reviewing the personal tax returns there may be Schedules “C”, “D” and “E” filed. Schedule “C” indicates that the borrower is either a sole proprietor or someone earning 1099 income. When examining Schedule “D” the borrower had either a Capital Gain or Capital Loss. Adjustments to the borrowers income maybe required. Schedule “E” could mean several things when examining the tax return. If the borrower owns real estate and is collecting rent or has expenses this usually filed on a Schedule “E” If a borrower files a Schedule “E” go through the schedule as the borrower could be involved with a partnership (P) or involved with “S” corporation (S).
Reviewing a btax return can really enlighten you about your borrower and to underwwrite more accurately.
When review business returns or complicated returns utilize the FNMA form 1084 formand you should have no problems determining the income to use.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at:firstname.lastname@example.org.