Knowledge Base
- How are Interest and Dividend Income Calculated? (Form 1040, Schedule B)
Schedule B - Interest & Dividends
If your borrower mentions having interests and dividends for qualification, but you're unsure where to locate this information, refer to our How Is This Income Calculated Tutorials! Both Fannie Mae and Freddie Mac mandate a recent 2-year history of the income's receipt. This can be established using copies of signed federal income tax returns or year-end account statements. To identify income on Federal Tax Returns, consult Schedule B. This is where Interest and Dividends from Self-Employment are documented.- Locate Recurring Interest Income (Schedule B, Line 1, or on the 1040, Line 2b) in the first year of returns.
- Add Recurring Dividend Income (Schedule B, Line 5, or on the 1040, Line 3b) from the same year to obtain the subtotal.
- Repeat steps 1 and 2 for the second set of tax returns.
- Add both year subtotals and divide by 24 months. This resulting total represents your monthly qualifying income.
- How is Rental Income Calculated? (Schedule E + Lease Agreements)
Rental Income (Schedule E + Lease Agreements)
Rapidio's Income Analysis Tool stands out as a comprehensive solution, simplifying the process of assessing rental income with precision and ease. One key feature is our ability to seamlessly integrate data from both tax returns and lease agreements, providing a holistic view of rental income sources. For Schedule E Rental income, tax returns including all attachments are required. Rapidio is able to pull the data from these returns for each property, and provide an accurate and fast calculation.- The analysis starts by processing the number of Fair Rental Days into the most accurate Monthly number.
- Rents Received (Schedule E, Line 3).
- Minus the Total Expenses (Schedule E, Line 20).
- Add back in the Insurance (Sched E, Line 9).
- Add Mortgage Interest (Schedule E, Lines 12 and 13).
- Add Taxes (Schedule E, Line 16).
- Add Depreciation and/or Depletion (Schedule E, Line 18).
- Add back any HOA dues (These should be specifically identified on Schedule E).
- Add any One-Time Extraordinary Expenses (Casualty Loss - Need evidence of this expense).
- Sum of steps 2-10 for the Annual Gross Rental Income (or Loss).
- Divided by the Monthly conversion from the Fair Rental Days to get the Monthly Gross Rental Income.
- Minus the Monthly PITIA (if applicable).
- This number is the Net Monthly Rental Income (or Loss).
- Identify the amount of monthly rent as agreed upon in the lease agreement.
- Multiply the monthly rent by 75%.
- How is Capital Gains Income Calculated? (IRS Form 1040, Schedule D)
Schedule D - Capital Gains (& Exception for Losses)
If your borrower mentions having capital gains they want to use for qualification, but you're unsure where to locate this information, refer to our How Is This Income Calculated Tutorials! Both Fannie Mae and Freddie Mac mandate a recent 2-year history of the income's receipt. This can be established using copies of signed federal income tax returns or year-end account statements. To identify income on Federal Tax Returns, consult Schedule D. This is where the Capital Gains are documented.- Find the Recurring Capital Gains (or Loss) on Schedule D (Schedule D, Page 2, Line 16) in the first year of returns. This is the subtotal for that first year of returns.
- Repeat step 1 for the second set of tax returns.
- Add both year subtotals and divide by 24 months. This resulting total represents your monthly qualifying income*.
- How is Farming Income Calculated? (IRS Form 1040, Schedule F)If your borrower mentions having a working farm and wants to use the income for qualification, but you're unsure where to locate this information, refer to our How Is This Income Calculated Tutorials! Both Fannie Mae and Freddie Mac mandate a recent 2-year history of the income's receipt, which can be provided through the use of the Federal Tax Returns. For Farming income, Schedule F is where the data needed for income calculations is located.
From Schedule F:
- Take the Net Profit or Loss Value (Schedule F, Line 34).
- Add Non-Tax Portion Ongoing Co-op & CCC Payments (See specifics below):
- Line 3a minus 3b
- Line 4a minus 4b
- Line 5a minus 5b
- Line 6a minus 6b
- Add non-recurring loss (Schedule F, Lines 2-8).
- Add Depreciation (Schedule F, Line 14).
- Add Amortization or Casualty Loss or Depletion *only if noted* (Schedule F, Line 32).
- Add Business Use of Home *only if noted* (Schedule F, Line 32).
- Sum steps 1-6 to get the year subtotal.
- Repeat steps 1-7 for the next year of income.
- Then follow the substeps:
- If income from year to year is increasing, then divide by 24 months to get the Average Monthly Income.
- If income from year to year is decreasing, then divide the most recent year by 12 months to get the Average Monthly Income.
- How is Sole Proprietor Income Calculated? (IRS Form 1040, Schedule C)
Schedule C - Sole Proprietor
Any income that is from a borrower’s sole proprietorship can be found on Schedule C of Federal Tax Returns. According to Fannie Mae and Freddie Mac guidelines, borrowers need to provide 2 years of recent Federal Tax Returns with Schedule C in order to use the income. In some cases, 1 year of the most recent tax return with Schedule C is allowed, but additional documentation is required to confirm stability.From Schedule C:
- Start by finding the Schedule C pages of the first year of federal tax returns.
- Find the Net Profit (or Loss) value (Schedule C, Line 31).
- Deduct the non-recurring income or add the non-recurring loss or expense (Schedule C, Line 6).
- Add in Depletion value (Schedule C, Line 12).
- Add in Depreciation value (Schedule C, Line 13).
- Add in the Non-Deductible Meals and Entertainment Exclusion (Schedule C, Line 24b).
- Add in the Business Use of Home (Schedule C, Line 30).
- Add the Business Mileage Depreciation:
- To calculate this value, find the Business Mileage (Schedule C, Page 2, Part IV, Line 44a or on attachment 4562, Line 30) and multiply it by the depreciation rate. The depreciation rates are provided by Fannie Mae and Freddie Mac.
- 2022: $.26, 2021: $.26
- Add in the Amortization or Casualty Loss, but only if it is specifically noted (Sched C, Page 2, Part V).
- Sum the subtotal of the first year of Schedule C income.
- Repeat steps 2-10 for the next year of tax returns.
- To obtain the total monthly qualifying, follow the substeps:
- If the income is increasing from year to year, then add the subtotals and divide by 24 months to obtain the Average Monthly Income.
- If the income is decreasing from year to year, then divide the most recent year by 12 months to obtain the Average Monthly Income.
From the PNL:
- Find the Tenative Profit or Loss Value.
- Subtract Other Income.
- Add Depletion.
- Add Depreciation.
- Subtract Deductible Meals and Entertainment.
- Sum steps 1-5. This is the YTD Income or Loss.
- Divide the YTD by the number of months passed.
- To obtain the number of months passed, take the day of the month / days in the month then add the number of months that have fully passed:
- Ex: April 15th —> (15/30) + 3 = Months Passed.
- The sum of step 7 is the Monthly Amount for the YTD PNL.
- Now compare the Monthly Amount for the YTD PNL to the Tax Return Monthly Amount.
- If the income is more than the Average Monthly Income from the tax returns, then it is not necessary to use the PNL.
- If the income is less than the Average Monthly Income from the tax returns, then the PNL calculation will be your final qualifying monthly income.
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