Chapter 32 — Further Reading

Self-employment analysis is the area of origination where reading a summary is most dangerous. The worksheets are revised, the guidelines are revised, and the tax forms themselves are revised. Every source below that carries a number carries it provisionally. Go to the publisher, get the current version, and work from that.

If you read only one thing

Fannie Mae Form 1084, Cash Flow Analysis — the current version, downloaded from Fannie Mae, with its instructions. It is free, it is a few pages, and it is the entire chapter in a form you can put next to a tax return. Print it, take a borrower's returns you have permission to use, and fill it in by hand once. Then fill in Freddie Mac's Form 91 with the same returns and compare the two results. Doing that once teaches more than reading this chapter three times, because it forces you to find every line on an actual return — which is the skill, and it is not the same skill as understanding why the line exists.

TIER 1 — Verified canonical

Institutions, statutes, forms, and frameworks you can stand behind.

• Fannie Mae, Form 1084 — Cash Flow Analysis. The published worksheet for converting a self-employed borrower's tax returns into qualifying monthly income. Structured by return type, with sections for Schedule C, Schedule E, Form 1065, Form 1120-S, and Form 1120. Revised periodically; always work from the current release.

• Fannie Mae, Form 1088 — Comparative Income Analysis. The companion tool for evaluating trend: it lays two or three years of a business's results side by side so the direction of the business, not just its most recent level, becomes visible. This is the document behind §32.9.

• Freddie Mac, Form 91 — Income Calculations. Freddie Mac's counterpart worksheet. Comparing it against Form 1084 on the same borrower is the fastest way to learn which parts of the analysis are universal and which are agency-specific.

• Fannie Mae Selling Guide. The authority on self-employment history requirements, ownership thresholds, the treatment of business income and losses, the use of business funds, and the documentation exception paths. Free, public, searchable, and updated continuously — which is why this book states its structure and refuses to print its current values.

• Freddie Mac Single-Family Seller/Servicer Guide. The parallel authority. Read the corresponding sections alongside Fannie's; the differences are real, occasionally decisive, and rarely discussed.

• Internal Revenue Service — the forms and their instructions. Schedule C; Schedule E; Form 1065 and Schedule K-1 (Form 1065); Form 1120-S and Schedule K-1 (Form 1120-S); Form 1120. The instructions are long, free, and the only correct source for what any line actually means. Read the K-1 instructions at least once; they are the bridge between two returns and most originators have never opened them.

• Truth in Lending Act and Regulation Z, including the ability-to-repay and qualified mortgage provisions. The legal foundation for why income must be verified with third-party records rather than stated. Central to Case Study 32.1.

• Dodd-Frank Wall Street Reform and Consumer Protection Act. The statute that added the ability-to-repay requirement to TILA and created the Consumer Financial Protection Bureau.

• Home Ownership and Equity Protection Act (HOEPA) and the Federal Reserve Board's 2008 amendments to Regulation Z — the first federal restriction on unverified-income lending, and the step before Dodd-Frank.

• Consumer Financial Protection Bureau — published rule text and small-entity compliance guides. The compliance guides are written to be read and are the most usable free explanation of the ATR/QM framework that exists.

• Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report (2011). The congressionally chartered examination of the crisis, including the deterioration of mortgage underwriting standards. Long, public, and worth reading in the original rather than in summary.

• HUD Handbook 4000.1 and the Department of Veterans Affairs lender handbook, for how self-employment analysis differs on government programs. The arithmetic is similar; the history requirements, documentation, and exception paths are not identical to the conventional rulebook.

TIER 2 — Attributed, specifics unverified

Real industry practice and benchmarks whose current values must be checked before you use them.

• The two-year self-employment history convention. Agency guidelines have long looked for roughly two years of self-employment history, with documented exception paths — for example, where a borrower has a shorter history in a business but a longer history of related employment or training. Both the general requirement and the exceptions have been revised. Verify the current language in the Selling Guide before you tell a borrower they need two years, and before you tell them they do not.

• The 25% ownership threshold for treating a borrower as self-employed. Widely used across agency guidelines. Verify the current definition; it determines whether a borrower who receives a W-2 from a company they partly own is documented as a wage earner or as a business owner, which is a different file.

• Debt-to-income limits in automated underwriting. Conventional automated underwriting has in recent years returned approvals at back-end ratios well above the 43% figure that anchors manual underwriting, in ranges up to roughly 50% depending on the overall file. These limits change and are further constrained by lender overlays. Never quote a ceiling you have not confirmed this month. Chapters 14 and 15 own the framework.

• The deductible share of business meals. Congress has changed it more than once, including a temporary change during the pandemic years. The logic of the meals and entertainment exclusion does not change; the percentage does. Verify current tax treatment before explaining the arithmetic to a borrower.

• The per-mile depreciation component of the standard mileage rate. Published annually by the IRS and changed nearly every year. On a Schedule C borrower with high business mileage this is real money. Get the current figure from the source; never estimate it.

• Schedule L / M-1 filing thresholds. Smaller corporations and partnerships are excused from completing the balance sheet and reconciliation schedules below a receipts-and-assets threshold, which is why the balance sheet you need for a liquidity analysis is sometimes simply absent. Verify the current threshold in the IRS instructions.

• Business liquidity conventions. Current ratio and quick ratio are standard analytical tools, and there is no universal published cutoff at which a withdrawal becomes acceptable. Treat any "minimum ratio" you are told as a lender overlay until you have seen it in writing.

• Mortgage industry trade press and lender-published origination guides. Useful for how underwriters actually read these files and for what conditions are commonly issued. Not authority. Anything you learn there is a hypothesis to check against the Selling Guide.

TIER 3 — Illustrative / constructed

Everything in this chapter that carries a specific dollar figure.

• The Fulton Avenue file — the S-corporation HVAC contractor, its two-year worksheet (\$109,500 / \$107,000), its 24-month average (\$9,020.83), its most recent year (\$8,916.67), the 2.3% decline, and the accountant's \$9,500. Constructed for teaching, frozen for consistency across Chapters 11, 14, 15, 32, and 34.

• The Linden Street file and the Chapter 32 self-employed overlay — Borrower 2 re-run as an S-corporation owner at \$3,837.50 a month, producing a 29.93% housing ratio and a 44.19% back-end ratio. A counterfactual; the canonical Linden Street facts are unchanged.

• Figure 32.1, the landscaping Schedule C, and Figure 32.2, the completed Fulton Avenue worksheet.

• The business balance sheet in §32.10 — \$132,000 of current assets, \$74,000 of current liabilities, the \$40,000 withdrawal, and the payroll arithmetic behind "about a week."

• Case Study 32.2, the mechanical insulation partnership, explicitly labeled a composite built from documented industry patterns.

• All rates, ratios, and pricing used in worked examples, including the 6.625% note rate and the 45% back-end ratio. Run current pricing and verify current guidelines.

A note on how to keep this current

Three habits, in order of value:

1. Subscribe to the Selling Guide announcements. They are free and they tell you what changed before a borrower does.
2. Re-download Form 1084 every year and diff it against the copy in your desk drawer. The differences are the year's teaching.
3. Take one CPA to lunch a year. Not for referrals — for the twenty minutes in which they explain what changed in their practice. They will tell you what is about to show up on next spring's returns, which is the only forward-looking information available anywhere in this chapter.