BUSINESS ASSET DOCUMENTATION REQUIREMENTS
Asset Statements
Fannie Mae: Two months of business asset statements
Freddie Mac: Three months of business asset statements when using business assets to analyze the health of the business. Otherwise, one month business asset statement is required.
FHA: One month business asset statement (two months if stocks/bonds)
VA: One month business asset statement
USDA: Two months of business asset statements
Business Tax Returns
If income is being used from the business, the business’ tax returns are required. Tax returns do not need to be provided if the borrower is qualifying without using business income.
ACCOUNT OWNERSHIP – ALL PRODUCTS EXCEPT NON-AGENCY
Assets held in a business account provided for funds to close or reserves can be used as long as the borrower is an owner of the business, regardless of the borrower’s ownership percentage.
ACCOUNT OWNERSHIP – PRIME JUMBO AND MI BUSTER
The ownership of the business asset account is documented differently depending on the borrower’s ownership percentage and whether they are listed on the account statement as outlined below:
When the borrower is 100% owner of the business, no additional documentation is required.
When the borrower owns < 100% of the business but the borrower is listed as the owner of the bank account on the statement, then no additional documentation is required.
If the borrower owns < 100% of the business and is not listed on the statement, then additional evidence from the bank must be obtained to show that the borrower has access to the funds.
HEALTH OF THE BUSINESS ANALYSIS – CONVENTIONAL, VA, FHA LOANS
When income from the business is being used to qualify, a Health of the Business Analysis must be performed to determine the liquidity of the business. These tests show that the health of the business will not be negatively impacted once the funds have been withdrawn.
Business assets only need to be proven liquid under one of the seven options below when income is being used to qualify. If business income is not being used to qualify, there is no need to analyze the health of the business.
Note that while FHA will accept a CPA letter attesting that the health of the business will not be affected by the withdrawal of assets, FNMA and FHLMC will not.
OPTION 1
If using two months of asset statements: compare the beginning balance of the previous month’s statement with the ending balance of the most recent month’s statement. If the most recent ending balance is greater than the beginning balance of the previous month, all funds on the most recent statement can be used.
Freddie Mac requires the above process to be completed with three months of business asset statements.
OPTION 2
If using two months of asset statements: if the daily balance section is reported on the bank statements, the lowest daily balance over the two-month period is the amount of funds that can be used in the loan transaction without negatively impacting the health of the business.
Freddie Mac requires the above process to be completed with three months of business asset statements.
OPTION 3
Review total assets listed on the most recent year of business tax returns. Any funds that have been documented on business asset statements can be used up to 50% of the amount of Total Assets listed on page 1 of the business tax returns.
OPTION 4
Compare Total Assets on page 1 of the business tax returns over the last two years. If the amount is greater on the most recent year, all documented business assets can be used.
OPTION 5
Review the balance sheet (Schedule L) from the 1065, 1120S, or 1120 to determine the liquidity of the business. Follow these two steps:
Determine if the current assets are greater than or equal to the current liabilities.
On Schedule L of the 1065, the current assets are the sum of lines 1, 2, 4, 5 & 6, and the current liabilities are lines 15-17.
On Schedule L of the 1120S, the current assets are the sum of lines 1, 2, 4, 5 & 6, and the current liabilities are lines 16-18.
On Schedule L of the 1120 the current assets are the sum of lines 1, 2, 4, 5, & 6, and the current liabilities are lines 16-18.
If the assets are equal to (or exceed) the liabilities, the business is considered stable and the business assets can be used.
OPTION 6
Take the sum of the total business expenses from the required years of tax returns (based on the AUS findings) and divide by the number of months in the years required by AUS. Multiply this number by 2, representing two months business reserves. Deduct this figure from the ending balance on the business bank statement. The remaining balance can be used to close. Note that depreciation can be removed from the total business expense figure when using this option.
OPTION 7
Reduction to Income: Treat the withdrawal of business funds as a hit to the borrower’s self-employed income as if it was an advance on future pay.
USDA
USDA loans can use all business funds as long as it is documented that the borrower is 100% owner of the business.