There was a rule that was a problem for some mortgage borrowers who had unreimbursed business expenses (UBE). Some people write off UBE on their tax returns. Writing off your unreimbursed business expenses is great at tax time because it reduces taxable gross income. But when applying for a mortgage it results in less income counted towards qualifying. And this obviously creates unforeseen problems.
Fannie made a change on Unreimbursed Business Expenses
However, Fannie Mae has made a change effective immediately that will alleviate this problem for many people. This is for mortgage borrowers who earn salaried base pay, bonus, overtime, or commission income that is less than 25% of the borrower’s annual income. In those cases UBE are not required to be deducted from the mortgage borrower’s qualifying income. If you earn commissions that are over 25% of your annual income, that will trigger deducting UBE from income. Then the old rules will apply and you will have unreimbursed business expenses deducted from your gross income.
The definition from Fannie Mae
Fannie Mae says, “The rule triggers when evaluating commission income that represents 25% or more of the borrower’s total annual employment income. The lender must consider certain tax deductions reported on IRS Form 2106 (Employee Business Expenses) when conducting the cash flow analysis. These expenses are out-of-pocket unreimbursed business expenses. These expenses must be deducted from the borrower’s income.”
Assume you make a $100,000/year salary and that is your only income. But you have $10,000 a year in UBE. The mortgage lender will not deduct the $10,000 in unreimbursed business expenses. Hence, they will use $100,000 a year as your qualifying income.
However, assume you make a $100,000/year base salary and assume you have $26,000 a year in UBE. The mortgage lender will deduct the $26,000 in unreimbursed business expenses and use $74,000 a year as your qualifying income. Since you have UBE that are over 25% of your gross annual income, the rule is triggered.
What question to ask my lender
This is important if you work in an industry that does not fully reimburse you for certain travel and business expenses. It is then important to ask your lender what type of loan you are applying for and if you’re qualifications will be impacted by UBE being deducted on your tax returns.