8. Analyzing Self-Employment Income
Sorry, this activity is currently hidden
Section outline
-
-
Students mustMark as done🚩 Report Issue🗓️ Recorded: 10/14/2025⏱️ Est. Time: 75 mins
Getting Started & the Sole Proprietor
This presentation, "Getting Started & the Sole Proprietor," is part of MGIC's series on evaluating self-employed borrowers, specifically focusing on the foundational concepts of business structures and the detailed analysis of sole proprietorships using Tax Year 2024 data.
What this session covers:
Self-Employment Fundamentals A borrower is classified as self-employed if they own 25% or more of an active business.Business Structure Literacy Understanding the five common structures—Sole Proprietorship, Partnership, LLC, S Corporation, and Corporation—is critical for identifying how income flows to the borrower and which tax forms are required.Income vs. Cash Flow Lenders must convert "taxable income" into "qualifying cash flow" by accounting for noncash expenses (like depreciation), IRS-limited expenses (like meals), and nonrecurring occurrences.Sole Proprietor Specifics Sole proprietors are unincorporated and have unlimited liability, reporting their business income on IRS Form 1040, Schedule C.Documentation and Tools Analysis relies on the loan application (URLA), one to two years of personal and business tax returns, and standardized cash flow worksheets like Fannie Mae Form 1084 or Freddie Mac Form 91.
-
-
-
Students mustMark as done🚩 Report Issue🗓️ Recorded: 10/16/2025⏱️ Est. Time: 60 mins
Concentrating on S Corporations
This presentation focuses on the advanced analysis of S Corporations and their specific tax documentation, providing a detailed framework for mortgage lenders to calculate a borrower's qualifying income.
What this session covers:
S Corporation Fundamentals An S Corporation is a legal entity with a limited number of stockholders where profits and losses pass through to individual shareholders who pay tax on their share of income.Documentation Requirements Analysis primarily requires IRS Form 1120-S (business return) and Schedule K-1 (individual shareholder's share), alongside personal tax returns and potentially W-2s.Shareholder Compensation Owners of S Corporations often receive income in two forms: W-2 wages and ordinary business income (distributions), both of which must be evaluated for stability and continuity.Cash Flow vs. Taxable Income Lenders must adjust reported taxable income by adding back noncash expenses such as depreciation, depletion, and amortization while subtracting nonrecurring gains.Qualifying Benchmarks Lenders look for a consistent two-year history of self-employment and verify business financial stability to ensure future income likelihood.
-
-
-
Students mustMark as done🚩 Report Issue🗓️ Recorded: 7/17/2025⏱️ Est. Time: 60 mins
Zeroing in Partnerships & LLCs
This presentation focuses on the specialized process of evaluating and calculating qualifying income for borrowers who are part of a Partnership, specifically utilizing Tax Year 2024 data.
What this session covers:
Self-Employment Threshold In mortgage lending, a borrower is considered self-employed if they own 25% or more of an active business.Partnership Structure A legal arrangement between two or more people where profits and losses pass through to individual partners who pay tax on their share.Key Tax Documentation Lenders rely on IRS Form 1065 (Partnership Return) and Schedule K-1 to identify ownership percentage and the borrower's specific share of income.Income Components Qualifying income often consists of Guaranteed Payments to the partner and their share of Ordinary Business Income.Cash Flow Adjustments Taxable income is converted to qualifying cash flow by adding back noncash expenses (like depreciation) and subtracting nonrecurring gains.Business Stability Lenders must determine if the business has a history of distributing income and if current trends support the likelihood that cash flow will continue.
-
-
-
Students mustMark as done
🚩 Report Issue🗓️ Recorded: 9/23/2025⏱️ Est. Time: 60 minsFocusing on Corporations & Financial Statements
This presentation focuses on the specialized evaluation of C-corporations and the analysis of their financial statements to determine qualifying income for mortgage borrowers. It covers the unique legal structure of corporations, specific tax documentation, and the critical role of business liquidity and stability in risk assessment.
What this session covers:
Corporate Fundamentals A C-corporation is a legal entity separate from its owners (shareholders), providing limited liability but requiring the entity itself to pay taxes on profits.Shareholder Compensation Income for corporate owners typically arrives as W-2 wages and/or dividends (reported on Form 1099-DIV), both of which must be verified for stability and future continuance.Tax Documentation The primary document for analysis is IRS Form 1120, the U.S. Corporation Income Tax Return, which lists gross receipts, total deductions, and taxable income.Cash Flow vs. Taxable Income Lenders convert taxable income to qualifying cash flow by adding back noncash expenses like depreciation and depletion while subtracting nonrecurring gains.Financial Statement Review Beyond tax returns, lenders analyze Profit and Loss (P&L) statements and Balance Sheets to assess current earnings trends and the business's overall liquidity.
-
-
-
Students mustMark as done🚩 Report Issue🗓️ Recorded: 7/24/2025⏱️ Est. Time: 60 mins
Overcoming Touch Challenges
This presentation focuses on advanced strategies for evaluating self-employed borrowers facing complex financial scenarios, such as declining income trends and large nonrecurring expenses. It provides a framework for analyzing business stability and using interim financial statements to support qualifying income.
What this session covers:
Income Stability Analysis Lenders must determine if business earnings support the likelihood of continued cash flow, with a particular focus on whether the business generates enough income to allow for regular distributions to the borrower.Managing Declining Income Guidelines specify that if a trend is declining but has stabilized, the lower amount must be used; if it is declining and unstable, the income may be disregarded entirely.Noncash and Nonrecurring Adjustments Calculating true cash flow requires adding back noncash expenses like depreciation or depletion and subtracting one-time nonrecurring gains.Business Liquidity Evaluating the balance sheet to ensure a business has sufficient current assets to cover liabilities and support ongoing operations.Documentation for Complex Files The use of Year-to-Date (YTD) Profit and Loss (P&L) statements and Letters of Explanation (LOE) to provide context for unusual financial fluctuations.
-
-
-
Reference Guide: Fannie Mae’s Approach to Self-Employed Income
-
