If you got bored one day and conducted your own “Man On The Street” survey and asked ten people if they like paying taxes, I would bet you get nine people would respond with a loud NO, and one person who says “yeah sure” (and I would bet probably did not understand the question).   So who can blame anyone for taking every single tax deduction possible to keep your tax bill down on April 15th?  That leads to people using the legal tax write off of unreimbursed business expenses, filed on IRS form 2106.   The reader’s digest version of this tax deduction is that the IRS allows you to deduct costs associated with your job or for certain costs associated with volunteering some time or work for a charity from your gross income.   This is great news to lower your tax bill a few dollars and recover some of the money you spent during the year but it used to have an unintended consequences when applying for a mortgage.

Even though most people in the mortgage business are not tax accountants or C.P.A.’s, in the mortgage business we are very familiar with this tax form and deduction but it has caused many unexpected underwriting turn downs.  The reason for the turn down is depending on how strict your investors are, many have guidelines stating for any borrower regardless of income type you would remove the 2106 write offs directly off of the borrowers  income.  For example if the U.R.E. was $50 per month and your borrower’s salary was $5,000 per month, your new income to qualify would have been $4950 per month.  The reason for the hard line stance in the past was the old guidance in Allregs was a little vague, so many companies just put a rule stating any borrower and any income type that reflected the 2106 expenses on the tax return the underwriter was to reduce the income to avoid any chance of a repurchase demand.

As of June 30, 2015 FNMA SEL 2015-07 has now made it very clear what type of income you are required to consider the 2106 expenses as a deduction.  Per the SEL the only time you need to remove the 2106 expense is when you have a borrower that is qualifying with 25% or more of his or her income that is commission.  

For example if your borrower has a base salary of $2,000 per month and commission income of $1,000 per month, your commissions exceed the 25% threshold so you would be required to remove the monthly average of the 2106 expenses.   The question as come up to me asking if Freddie Mac has this same rule, the answer is no, as Freddie’s guidelines just require you to remove the 2106 expenses for any commissioned borrower regardless of how much of a percentage the commission income against the borrowers base income.  So Freddie was better than Fannie on the reduction of income but with this new rule Fannie Mae will be your better bet.

Hopefully this rule change will allow a few more borrowers to qualify for a new mortgage.

The changes keep coming from both Fannie and Freddie, we will be back next week with some more guideline information to make sure you are up to date!