When a borrower is relying upon self-employed income to qualify for a mortgage and the requirements that permit the lender to waive business tax returns are not met, the lender must prepare a written evaluation of its analysis of the borrower’s business income. The lender must evaluate the borrower’s business through its knowledge of other businesses in the same industry to confirm the stability of the borrower’s business income and estimate the potential for long-term earnings.
The purpose of this analysis is to:
- consider the recurring nature of the business income, including identification of pass-through income that may require additional evaluation;
- measure year-to-year trends for gross income, expenses, and taxable income for the business;
- determine (on a yearly or interim basis) the percentage of gross income attributed to expenses and taxable income; and
- determine a trend for the business based on the change in these percentages over time.
The lender may use Fannie Mae’s Comparative Income Analysis (Form 1088)* or any other method of trend analysis that enables it to determine a business’s viability, as long as the method used fairly presents the viability of the business and results in a degree of accuracy and a conclusion that is comparable to that which would be reached by use of Form 1088.
A copy of the written analysis and conclusions must be retained in the individual mortgage file.
For additional information, see B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.
*For a complete list of forms used in fulfilling requirements contained in the Selling and Servicing Guides, see the Guide Forms page.