Qualifying Borrowers Using Personal Tax Returns Part 2: Schedules D, E & F

Part 2 of this information-intensive series will continue the journey to convert 1040 personal tax returns into cash flow and will focus on Schedules D, E, and F. Learn more about making solid lending decisions by understanding how to get cash flow from personal tax returns.

Learning Objectives

• Identify the real cash flow from Schedule D: Capital Gains and Losses and determine whether it is recurring income or a one-time event
• See the real cash flow from a rental property or source of royalty income (Schedule E, Page 1) – it’s more than just adding back depreciation
• Weed out “phantom” pass-through incomes and find the real cash flow from partnerships and S corporations (Schedule E, Page 2)
• Determine if that farm is earning a cash profit or not (Schedule F)

Tax returns don’t show cash flow; they show taxable income. What you need to know is cash flow because that is how your loan is paid back. With the process outlined in this session and the free Lenders Tax Analyzer© software each registrant receives, you will gain an easy, reliable method to convert a borrower’s personal tax return (Form 1040) into a borrower’s cash flow statement.

In Part 2 of this two-part series, you will learn to cash flow Schedule D: Capital Gains and Losses; Schedule E, Page 1 (Rental and Royalty Income); Schedule E, Page 2 (Partnerships and S Corporations), and Schedule F (Farm Income). When you finish this session, you will be able do a little “magic” and convert taxable incomes into cash flows, which you can then plug into your credit scoring model, debt-to-income ratio, or disposable income calculation.

Note: This session is designed for consumer and commercial lenders. This method does not follow Fannie, Freddie, or QM rules used in mortgage lending.