NPF Income Calculator Guide

Transcription

NPF Income Calculator
Guide
1
For internal use only
Table of Contents
1.
Introduction ----------------------------------------------------------------------------------------------------------------- 3
I.
What is the purpose of this guide? --------------------------------------------------------------------------------- 3
II. When is the NPF Income Calculator required? ------------------------------------------------------------------ 3
III. Key Factors in Evaluating Qualifying Income -------------------------------------------------------------------- 3
2.
How to Use the NPF Income Calculator ------------------------------------------------------------------------------ 3
I.
Wage Earner Tabs: ----------------------------------------------------------------------------------------------------- 4
II. Non-Employment Income Tabs: ------------------------------------------------------------------------------------ 7
III. Self-Employed Tabs: --------------------------------------------------------------------------------------------------- 8
a)
W2 Income = Wages paid to borrower(s) by a business they own-------------------------------------- 8
b)
Schedule C = Sole Proprietorship -------------------------------------------------------------------------------- 9
c)
Form 1120S/K1 = S Corporation (Shareholder’s Share of Income, Deductions, Credits, etc.) --- 10
d)
Form 1120S = US Income Tax Return for an S Corporation ---------------------------------------------- 10
e)
Form 1120 = US Corporation Income Tax Return ---------------------------------------------------------- 11
f)
Form 1065/K1 = Partner’s Share of Income, Deductions, Credits, etc. ------------------------------- 12
g)
Form 1065 = US Return of Partnership Income ------------------------------------------------------------- 13
h)
Schedule F – Profit or Loss from Farming -------------------------------------------------------------------- 14
IV. Rental Income Tabs: -------------------------------------------------------------------------------------------------- 15
V. Military Pay:------------------------------------------------------------------------------------------------------------- 20
3.
Basic Income Calculation Charts -------------------------------------------------------------------------------------- 21
2
1. Introduction
NPF Underwriters are required to make a reasonable, good faith determination of a borrower’s
ability to repay (ATR), a significant component of which is verifying and evaluating an adequate
amount of qualifying income. The NPF Income Calculator is a tool to aid in the evaluation of
income that must be used in conjunction with all applicable program guidelines and NPF
Policies & Procedures.
I.
What is the purpose of this guide?
To facilitate the use of the NPF Income Calculator to accurately determine the gross monthly
qualifying income of a borrower.
II.



When is the NPF Income Calculator required?
ALL loans
ALL borrowers
ALL sources of qualifying income
NOTE: Failure to use the NPF Income Calculator may result in disciplinary action.
III.




Key Factors in Evaluating Qualifying Income
Verifiable by Third Party Records
Stability of Income and Employment
Continuity of Income
Income Trending (Increasing/Decreasing)
NOTE: For all income types with a declining earnings trend, determine the reason and establish that the
income has stabilized if it will be used in qualifying. The current, lower amount of income must then be
used. In no instance should declining income be averaged with prior year(s).
2. How to Use the NPF Income Calculator
Refer to agency guidelines, AUS findings, NPF Matrices and Product Profiles for minimum
documentation and other requirements for each applicable income source. Underwriters must
also complete and upload the QM-Income & Debt Validation/QM Doc Checklists on all
Portfolio loans (last two tabs of the NPF Income Calculator).
 The NPF Income Calculator contains the following tabs for borrowers #1 and #2. Copies
may be created for additional borrowers:
o Wage Earner
o Non-Employment Income
o Self-Employed
o Rental Income
o Military Pay
 Green fields are editable
 Enter Borrower Name, Loan Number, and Employer/Business Name at top of the
applicable tab
3

I.

Comments section must be used to notate rationale for income used to qualify
Wage Earner Tabs:
Use the Data Entry section on the right side of the worksheet to enter all applicable
dates and amounts from the income documentation, including any variable income to
be used in qualifying (Overtime, Commission, Bonus). The corresponding fields on the
left side of the worksheet will populate once data is entered.
Enter Data on Right Side

Current Year Start Month and Date defaults to January 1. For newer employment,
enter the exact start date to accurately calculate YTD earnings:
Update if Start Date is After January 1
NOTE: Current Year Start Month and Date must also be entered for any applicable variable
income (OT, Commission, Bonus)

Once all applicable data is entered, several calculation options will populate on the left
side of the worksheet. Analyze the stability of each income source and earnings trend,
then select the most appropriate figure from the Use this Amount dropdown box:
4
Data Populates on Left Side
Select Amount
Select Amount
Example of Declining Income:
YTD average of overtime is less than prior years. Determine if it is stable enough to be used in
qualifying and use the most recent earnings trend to qualify. Do not average declining income
with prior year(s).
Select Amount

Enter any unreimbursed business expenses (1040 Schedule A, Line 21). May also enter
business mileage and depreciation from Form 2106:
5
Enter Each Applicable Year
Select Amount

Treatment of URE depends on the loan program and number of years obtained:
Years Obtained
1 Year - DTI (Liability)
1 Year– Subtract from Income
2 Years – DTI (Liability)
2 Years – Subtract from Income

Conventional - FNMA
X
Conventional – FLMC
FHA
X
X
VA
X
Portfolio
X
X
X
X
X
X
Once all Use this Amount selections have been made, qualifying income populates at
the bottom of the worksheet.
See Treatment of URE Chart Above


Ensure Destiny data entry matches NPF Income Calculator
o Do not enter variable income as a lump sum with base. All sources must be
clearly defined.
Print to XDOC
o Only the left side of the Wage Earner tab will print when selected. Data Entry
section is not required to be printed.
6
II.

Non-Employment Income Tabs:
Each eligible income source is listed in the worksheet:
o Social Security
o
o
o
o
o
o
o
o
o



Annuity
Pension
Alimony / Child Support
Foster Care
VA Benefits
Trust Income
Other Income
Capital Gains
Notes Receivable
o Dividend / Interest
o Unemployment
Establish continuity of the income source
o Income which does not have a defined expiration date with the applicable
history of receipt documented may be considered likely to continue.
o Income which has a defined expiration date or is dependent on the depletion of
assets requires evidence to support a minimum three-year continuance.
Enter the Pay Frequency and Amount for each applicable source
Review the tax returns to determine what portion (if any) of Social Security, Pension,
Child Support, VA Benefits, or Other Income is non-taxable. Non-taxable income may be
grossed up as much as 25% (refer to program specific guidelines).
Example of Social Security Income on tax returns:

Enter the total benefit amount. Select Yes/No from the Gross Up Income? dropdown
box. Enter the applicable Gross Up %:

Enter taxable amount:

The worksheet will calculate the difference between the total income benefit and the
taxable amount and gross up only the non-taxable portion.
7

The total qualifying income for each source populates at the bottom of the worksheet:
Total of non-taxable and taxable

When a two year history is required, enter both years and evaluate the earnings trend.
o Stable and increasing – use 24 month average
o Decreasing - determine the reason and establish that the income has stabilized,
then use the most recent 12 month average
Use 12 month average
when declining


III.
Print to XDOC
Self-Employed Tabs:
A borrower with a 25% or greater ownership interest in a business is considered self-employed
and will be evaluated as a self-employed borrower for underwriting purposes.

Enter the data as it is reflected on the tax returns:
o If the figure is negative on the tax return (loss), enter as a negative number
o The calculator contains formulas to deduct appropriate expenses, so negative
entry is not required when the figures on the tax returns are positive
o The calculator contains formulas to add back allowable expenses
NOTE: For all business types, non-recurring gains and other income must be deducted from qualifying
income if proof of continuance cannot be documented. Likewise, non-recurring losses may be added
back to qualifying income if documentation is obtained to verify they will not continue.

Determine the type of business and complete the applicable section(s) of the
worksheet. Click the Hide button to minimize any section(s) which do not apply to the
loan.
Click to Minimize Inapplicable Sections
a) W2 Income = Wages paid to borrower(s) by a business they own
 Enter Base Income from box 5 of W2 for each applicable year
8


Analyze the earnings trend to determine if stable or increasing. If decreasing, determine
the reason and establish that the income has stabilized and use most recent earnings
trend to qualify. Do not average declining income with prior year(s).
Select the appropriate Amount Used to Qualify from the dropdown box
Enter Data Here
Select Amount
b) Schedule C = Sole Proprietorship



Enter data from the tax returns for the applicable year(s). Line numbers are provided
for reference. Note: Amortization/Casualty Loss is found on Page 2/Part V.
Remember to deduct any non-recurring income
Select Amount

Most Recent Tax Year column may also be used to enter YTD P&L data. To change,
select Current Year P&L from dropdown box. Additional fields open at the right to enter
P&L start and end dates:
9
c) Form 1120S/K1 = S Corporation (Shareholder’s Share of Income, Deductions, Credits, etc.)



Enter data from the tax returns for the applicable year(s). Line numbers are provided
for reference.
Select Amount
NOTE: Most Recent Tax Year column may also be used to enter YTD P&L data. Select Current Year
P&L from dropdown box. Additional fields open at the right to enter P&L start and end dates (see
example under Schedule C).
d) Form 1120S = US Income Tax Return for an S Corporation
 Enter data from the tax returns for the applicable year(s). Line numbers are provided
for reference.
 Enter non-recurring gains/income/loss as a positive number. The worksheet contains
formulas to add or subtract, accordingly.
 IMPORTANT: Line 19 is the total of “other deductions”. Must review attached
statement to determine what portion of the total, if any, is attributed to
amortization/casualty loss and enter only that amount.
 Enter % of Ownership
10


Enter only the portion of Line 19 related
to amortization/casualty loss
Select Amount
NOTE: Most Recent Tax Year column may also be used to enter YTD P&L data. Select Current Year P&L
from dropdown box. Additional fields open at the right to enter P&L start and end dates (see example
under Schedule C).
e) Form 1120 = US Corporation Income Tax Return
for reference.
 Dividends Paid to Borrower by the corporation will be found on 1040 Schedule A. If
dividend/interest income will be used to qualify, it must be evaluated on the NonEmployment Income tab and entered accordingly in Destiny.
 Analyze the earnings trend to determine if stable or increasing. If decreasing, determine
 Select the appropriate Amount Used to Qualify from the dropdown box
11
Dividends paid by Corporation are
found on 1040 Schedule A
f) Form 1065/K1 = Partner’s Share of Income, Deductions, Credits, etc.
for reference.
 If Line #2 and/or #3 is negative on the tax return, enter as a negative to capture the loss
12
Select Amount
g) Form 1065 = US Return of Partnership Income
for reference.
13
Select Amount
h) Schedule F – Profit or Loss from Farming
 Enter data from the tax returns for the applicable year(s).
Select Amount
14
Income Summary
 Based on Amount Used to Qualify selections made for each business type, an Income
Summary populates at the bottom of the worksheet:
NOTE: Each business owned must be entered independently in Destiny, including the percentage of
ownership and length of self-employment – do not lump together under one source.


IV.
Print to XDOC
Rental Income Tabs:
a) Non-Subject Investment Property
 Confirm the borrower still owns each investment property used to qualify
 Enter the End of Effective Tax Year, Purchase Date, Property Address and data from the
Schedule E from the tax returns for the applicable year(s) for each property. Line
numbers are provided for reference.
 Enter data as it is reflected on the tax returns:
o If the figure is negative on the tax return (loss), enter as a negative number
o The calculator contains formulas to deduct appropriate expenses, so negative
entry is not required when the figures on the tax returns are reflected as a
positive
o The calculator contains formulas to add back allowable expenses
 Enter the current Principal & Interest, Insurance, Taxes, HOA Dues (PITIA) and Other
expenses (i.e. ground rent)
NOTE: Ensure any secondary financing is also included. If current payment includes
escrows, do not enter T&I again or break down the PITI to ensure accurate calculations.

Enter the Number of Months used to calculate Monthly Rental Income
NOTE: The number of months must be greater than zero for all properties or an error will fire for the
total at the bottom of the worksheet. Therefore, all properties default to 1 month.

o If the property has been owned > 2 years, enter 24 months
o If the property has been owned < 2 years, enter the exact # of months owned
Enter the # of Months Reserves required per the applicable guidelines.
15


o A dollar amount will populate in Reserves Required.
o When not using rental income to qualify (i.e. second home), enter PITIA only to
calculate reserves.
o A cumulative Total Reserves Required will populate at the bottom of the
worksheet for all properties entered.
Enter % of Ownership
Total Net Income populates at the bottom of the worksheet
Purchased < 2 Years
Determine if payment
includes T&I and Include
any secondary financing
Enter # of Months
Enter # of Months
Note: Taxes and Insurance per Schedule E may be used to qualify
Totals Populate at
the Bottom
b) Non-Owner Occupied Subject Property:
 Follow above guidance, with exception to entering the current PITIA.
 Enter the proposed PITIA for the new loan.
16
Enter proposed PITIA
c) Owner-Occupied 2-4 Unit Subject Property:
 Follow above guidance, with exception to entering the current PITIA.
 The proposed PITIA may be entered in the worksheet for the purpose of calculating
required reserves only, but the entire PITIA must be included in the qualifying ratios.
 Use the Monthly Rental Income figure to qualify, not the Total Net Income figure.
 Enter in Destiny as follows:
o For loans approved through DU
o For loans approved through LP
17
Use This Amount to Qualify
Enter proposed PITIA to calculate
required reserves only
Note: PITIA may be left blank on an owner-occupied property, but required reserves will not
be calculated or included in cumulative total
d) Declining Rental Income:
 In the case of declining rental income, the lower, most recent average must be used.
The Previous Tax Year data must be removed from the worksheet to obtain an accurate
12 month average. Add comments to indicate the income was declining from prior year.
18
Do NOT do this:
DO this:

19

V.


Print to XDOC
Military Pay:


Enter amounts from Earnings and Leave Statement
Generally, BAS and BAH may be grossed up to 115%. Refer to applicable program
guidelines.
If the Gross Up Factor field is left blank, income will not be grossed up
Total Income populates at the bottom of the worksheet


Print to XDOC
20
3. Basic Income Calculation Charts
The following charts provide general guidance on the calculation of qualifying income. Refer to
agency guidelines, AUS findings, NPF Matrices and Product Profiles for minimum
documentation and other requirements for each applicable income source. Underwriters must
also complete and upload the QM-Income & Debt Validation/QM-Doc Checklists on all
Portfolio loans (last two tabs of the NPF Income Calculator).
Monthly Gross Wages:
Frequency of Payment
How to Determine Monthly Income
Annually – borrower is paid one time per year as Annual gross pay / 12 months
indicated on paystub.
Monthly – borrower is paid one time per month
Monthly gross payment amount
(pay period is for one calendar month) as
indicated on paystub.
Twice Monthly – borrower is paid semimonthly
Twice monthly gross pay x 2 pay periods
Biweekly – borrower is paid every two weeks, for (Biweekly gross pay x 26 pay periods) / 12
example every other Friday. Borrower receives
months
26 paystubs a year and may have three pay
periods in a single month.
Weekly – borrower is paid every week, for
(Weekly gross pay x 52 pay periods) / 12
example every Friday.
months
Hourly – borrower’s income is based on an hourly (Hourly gross pay x average # of hours worked
wage not a set salary, the number of hours paid
per week* x 52 weeks) / 12 months
per week can vary.
*If the paystub only includes one week of pay, use the actual number of hours worked. If the paystub
includes multiple weeks, divide total hours by number of weeks worked.
Variable income (Commission, Bonus, or Overtime):
History of Receipt
> 24 Months
Two or more years receipt of a
particular type of variable
income is generally
recommended
Determine how often the
income is received and use the
Monthly Gross Wages guidance
above to calculate monthly
gross income
21
12-24 Months
May be considered, provided a
sound rationale can be
documented for use of the
income
Frequency of Payment
Example:
Annual bonus = $12,000
$12,000 / 12 = $1000 monthly
income*
< 12 months
Variable income earned for less
than one year is generally not
considered effective income
In cases where variable income
must be annualized (i.e. DU Refi
Plus and LPOA), calculate as
follows:
Quarterly commission = $8000 /
4 = $2000 monthly income*
*See income trending below
Pay period ending 10/15/2013
YTD overtime earnings = $4,500
Annualized calculation: $4,500 /
12 = $375.00
DO NOT use this method: $4500
/ 9.5 = $473.68
Income Trending
Stable and Increasing
Decreasing
Average current earnings with prior year(s)
Determine the reason and establish that the
income has stabilized if it will be used in
qualifying. Average the lesser of YTD or most
recent 12 months earnings. Do not average
declining income with prior year(s)
Note: Generally, a written verification of employment is necessary to determine the breakdown of the
bonus, commission, or overtime income received in prior years. However, if alternative documentation
supports the use of variable income, it may be used in lieu of the WVOE.
Monthly Social Security, Disability or Death Benefits, or Pension:
If Documentation Received Was:
Documentation showing the amount and
frequency of the benefits (i.e. award letter or
benefit statement
Federal tax returns or 1099
Then Determine Monthly Income as Follows:
Determine the frequency of payment and use the
Monthly Gross Wages guidance above to
determine borrower’s monthly income.
Annual gross amount / 12
Monthly Alimony, Child Support or Separate Maintenance Payments Income:
Copy of Divorce Decree, separation agreement,
court decree, etc.
AND
Determine the frequency of payment from the
divorce decree, separation agreement, or court
decree, and use the Monthly Gross Wages
guidance above to determine monthly gross
income.
Bank statements or other documents showing
receipt of payment
Note: Inclusion of income from alimony, child support or separate maintenance is optional and should
only be used to qualify if this income is provided on the application.
Special consideration for non-taxable income:

If the income is verified to be non-taxable and the tax-exempt status is likely to
continue, an “adjusted gross income” may be developed by adding up to 25% of the
nontaxable income to the borrower’s income. Refer to program specific guidelines.
22
Self-Employment
Federal income tax returns, and as applicable, the
business tax returns
Use the NPF Income Worksheet for Self
Employed borrowers to analyze earnings trend
and determine monthly gross income.
AND
Use the profit/loss statement to document
continuation of business activity and stability of
income.
YTD profit/loss statement
Rental Income
How rental income is calculated will vary depending on whether or not the borrower has a history of
renting the property and whether the prior year tax return includes the income.
Note: Additional reserve requirements may apply. Refer to applicable program guidelines.
Property in Service for Entire
Tax Year: Yes / No
Yes
If Documentation
Received Was:
Federal tax returns
No. Property was in service
for only a portion of the prior
tax year.
Federal tax returns
(Schedule E should
reflect fair rental
days)
No. Property was purchased
in current tax year.
Lease agreement*
Owner Occupied 2-4 Units
If Documentation
Received Was:
Lease agreement*
Applicable when additional
units of a principal residence
are rented out.
Note: Income from boarders
in the borrower’s principal
residence is generally not
acceptable
Conversion of Primary
Residence to Investment
23
Federal tax returns
If Documentation
Received Was:
Lease Agreement*
Then Determine Monthly Income/Loss as
Follows:
Use the NPF Rental Income Worksheet for
the appropriate year(s) to determine net
monthly rental income/loss
Use the NPF Rental Income Worksheet for
the appropriate year to determine net
monthly rental income/loss. Number of
months used to calculate Monthly Rental
Income will be determined by fair rental
days per Schedule E.
Multiply the gross rent(s) by 75%. The
remaining 25% of the gross rent will be
absorbed by vacancy losses and ongoing
maintenance expenses
Then Determine Monthly Income as
Follows:
Multiply the gross rent(s) by 75%
Schedule E:
1.) Determine the annual gross rental
income reported on the tax returns.
2.) Convert to a gross monthly rental
income by dividing by the number of
months the property was owned
Then Determine Monthly Income as
Follows:
Multiply the gross rent(s) by 75%. The
remaining 25% of the gross rent will be
Evidence of 30%
equity in current
residence**
absorbed by vacancy losses and ongoing
maintenance expenses
Proof security
deposit cleared
borrower’s account
*Documentation using a standalone lease is only acceptable if rental income is not reported on Schedule
E of federal tax return with evidence the property was purchased in current tax year. When appraisal
form 1007 is required, the lesser of the market rent and lease amount must be used to qualify.
**Conventional only – refer to applicable program guidelines
If you have any additional questions, please contact your
Team Lead or training at:
[email protected]
24

NPF Income Calculator Guide

Transcription

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