The Carrington Mortgage Services, LLC (CMS) Fannie Mae Underwriting Guidelines are being updated to include recent Desktop Underwriter (DU) changes for calculating self-employment income, commission income and unreimbursed business expenses as described below.
Calculating Self-employment Income
FNMA updated the self-employment income calculation and evaluation policy. Current policy allows lenders to use vendor tools to calculate self-employment income. These tools can be used to complete the cash flow analysis provided the tool applies the same principles as Fannie Mae’s Cash Flow Analysis (Form 1084). The Guide has been updated to reflect the use of approved vendor tools and the criteria that will result in enforcement relief. The list of Approved Vendor Tools is available on Fannie Mae’s website. In addition, the Special Feature Codes list has been updated to include SFC 777. Lenders may receive enforcement relief when using a Fannie Mae-approved vendor tool immediately (as of December 4, 2018).
Commission Income and Unreimbursed Business Expenses
FNMA is removing the different treatment of commission income based on the percentage of employment income. Going forward all commission income will be treated the same, and individual tax returns (or tax transcripts) will no longer be required. FNMA is updating its policy regarding commission income and unreimbursed business expenses due to recent changes made by the IRS that are effective with the reporting of 2018 federal income taxes.
Currently, unreimbursed employee expenses are reported as a deduction on the borrower’s individual federal income tax return (IRS Form 2106, or IRS Form 1040, Schedule A or C). These expenses are used when calculating an automobile allowance and commission income when it is 25% or more of employment income.
As a result of the tax law changes that will prevent lenders from being able to identify unreimbursed business expenses, FNMA is removing the requirements for IRS Form 2106, and changing the automobile allowance policy. The full amount of an automobile allowance may now be included as income and the lease or financing expenditure must be included as a debt in the calculation of the debt-to-income (DTI) ratio.
Note: history of receipt of this income will continue to be required.
Commission Income and Unreimbursed Business Expenses, continued
Effective immediately, Lenders are no longer required to obtain tax return documentation or tax transcripts to identify unreimbursed business expenses.
The DU messages reflecting these changes will be updated in a future release. Until then, Lenders may disregard the requirement to obtain IRS Form 1040 or Form 2106 for commission income and automobile allowance. Loan files that include qualifying income from an automobile allowance that is calculated following the “actual cash flow approach” must continue to include IRS Form 2106. This includes the practice of directly offsetting an automobile lease payment with an automobile allowance if the lease payment is captured as an expense on Form 2106.
Until the DU validation service is updated, Lenders must continue to obtain a tax transcript for borrowers with commission income that is 25% or more of employment income to be eligible for income validation.
DU Version 10.3
The Guidelines will also be updated to reflect the changes that were announced in the DU/Desktop Originator® Version 10.3 Release Notes, including:
- risk factors evaluated by DU;
- new six month minimum reserve requirement for cash-out refinance transactions for borrowers with DTI ratios exceeding 45%;
- changes to how loans are underwritten if a borrower has a credit score, based only on medical tradelines; and
- appraisal waiver changes:
- messages for disaster impacted areas (see Appraisal Waiver Policy for Disasters above),
- properties valued at $1,000,000 or more are not eligible for an appraisal waiver offer for refinances.
The DU resubmission tolerance that applies to data changes resulting in an increase to the DTI ratio has also been updated. Refer to the DU Version 10.3 Release Notes for additional information, including how the changes will impact DU Version 10.2 and 10.3 casefiles. In addition, the Eligibility Matrix has been updated to reflect “DU Version 10.3” and the reserve requirement for cash-out refinances.
Please contact CorrespondentRM@carringtonms.com with any questions.
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