The Schedule A of the 1040 tax returns outlines itemized tax deductions which ultimately help reduce the amount of taxes owed to the IRS. The mortgage industry pays attention to the Unreimbursed Business Expenses that appear on line 20 (which flows over from the 2106 Form) and may count those losses in your Qualifying Income. In the event these losses are subtracted from the income, the industry will take a two-year average of these losses (or use the most recent year’s loss if it was more than the previous year) and those will be considered in your debt to income calculations.
When To Count Losses
The 2016 / Schedule A Unreimbursed Business Expenses losses must be considered when commission income is receive OR when an automobile allowance is included in the borrower’s monthly qualifying income.
For FHA and VA loans, if commission income of any amount is received then these unreimbursed expenses must be deducted from the income. (Technically, the VA is “silent” on when to count these expenses so the mortgage industry defaults to FHA guidelines.)
For Conventional Loans: Fannie Mae says the unreimbursed expense from the Schedule A can be ignored so long as the qualifying income is comprised less than 25% of commission income. If commissions total 25% or more of their base salary then the 2106/Schedule A losses must be counted. Note: bonus and overtime income doesn’t matter for these calculations.
For USDA home loans the Schedule A / 2106 expenses will always be included in the qualifying numbers, regardless of pay structure.
When an automobile allowance is included in the borrower’s monthly qualifying income, the automobile depreciation claimed on IRS Form 2106 should be added-back to unreimbursed business expense calculation so as not to count it twice since the auto payments are considered part of the borrower’s recurring monthly debt obligations. In other words, the auto depreciation add-back lessens the loss from the unreimbursed business expenses. Don’t confuse this with adding back Automobile Mileage from a Schedule C or other Income Allowances.
Loan Officer, NMLS # 729612