Effective with applications taken on or after February 1, 2016, for all DU approved conventional loans, PennyMac is aligning with Fannie Mae’s updated self-employment income policies relating to 1065 partnerships and 1120-S corps.
Per Fannie Mae B3-3.2.2:
Business income may only be used to qualify the borrower if the lender obtains documentation verifying that
- the borrower has ownership of the income (Schedule K-1 may be used to document ownership share), and
- the income was actually distributed to the borrower.
Alternatively, the lender can obtain documentation verifying that
- the borrower has access to the income through a corporate resolution or other documentation that the lender determines is appropriate—unless the borrower(s) own 100% of the business, in which case confirmation of access to the income is not required; and
- the business has adequate liquidity to support the withdrawal of earnings.
Business income* should be calculated based on the number of years of tax returns required by DU:
- If DU requires one year of tax returns, the lesser of business income or distributions should be used for qualifying income.
- If DU requires two years, and the business income is decreasing, then the qualifying income should be the lesser of the current year business income or current year distributions.
- If DU requires two years, and the business income is the same or increasing, then
- A) Calculate the business income based on the most recent 24 months,
- B) Average the distributions over the same 24 months,
- If the current year distributions are $0, the borrower will need to demonstrate access to the income and business liquidity.
- The qualifying income should be the lesser of A or B.
*Business income includes all adjustments that would normally be required to calculate self-employed income. Distributions are the amount of money the borrower actually received from the business, as documented on the K-1.
Examples: Green indicates amount that should be used to qualify. All examples assume two years tax returns are required.
| 2013 | 2014 | Income Used to Qualify | |
| Income | $20,000 | $15,000 | $15,000/12 = $1,250 |
| Distribution | $10,000 | $5,000 | $5,000/12 = $416 |
| Income | $20,000 | $15,000 | $15,000/12 = $1250 |
| Distribution | $5,000 | $10,000 | $10,000/12 = $833 |
| Income | $15,000 | $20,000 | $35,000/24 = $1,458 |
| Distribution | $10,000 | $5,000 | $15,000/24 = $625 |
| Income | $15,000 | $20,000 | $35,000/24 = $1,458 |
| Distribution | $17,000 | $23,000 | $40,000/24 = $1,666 |
| Income | $15,000 | $20,000 | $35,000/24 = $1,458 |
| Distribution | 0 | 0 | $0/24 = $0 |
| Income | $15,000 | $20,000 | $35,000/24 = $1,458 |
| Distribution | 0 | $10,000 | $10,000/24 = $416 |
| Income | $15,000 | $20,000 | $35,000/24 = $1,458 |
| Distribution | $25,000 | 0 | $0/24 = $0 |
If distributions are insufficient to support the business income, the following alternative approach may be used:
The business income may be used to qualify if both “1” and “2” are met:
1. Document the borrower’s access to the business funds via:
- 100% ownership,
- A partnership agreement indicating access,
- A corporate resolution indicating access, or
- Other documentation determined to be appropriate.
2. The business has adequate liquidity to support the withdrawal.
- Liquidity is defined as documented liquid business assets less business liabilities.
Please contact your Sales Representative with any questions.