Home Buying in Atlanta>Question Details

Hiram Abiff, Home Buyer in Tampa, FL

I am self employed. The bank, deducted Line 24b from my income. They said it is because of the IRS guidelines that ask them to deduct 50%.

Asked by Hiram Abiff, Tampa, FL Tue May 14, 2013

I showed them the SAME IRS page they had, and pinpoint the paragraph of "exceptions to the 50%" where it says that I fall under the category of those that they should be deducted only 20%.
They asked to talk to my accountant on the spot. They did. My accountant not only assured them but also sent them a letter stating that this amount of money is an allowance the government pays to the professionals of the industry I belong to, which reality not only it shouldn't be deducted but it should be added to my income in order for them to see what I REALLY earn each year.
The bank for more than 2 weeks now avoids answering me on something that is CLEARLY stated to the IRS guidelines.
My question to all of you is: what can I do to make them give me an answer?
I proved them they lack of knowledge they avenge me by not answering me.
Don't tell me go for another lender; I want to know what can I do to bring them before their responsibilities or even before the law for their negligence?

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Answers

13
Hi Hiram,
I would not suggest that you would have to use another lender. That is because your current lender is correct on your income calculation and the answer they gave you. It was just not the answer that you wanted to hear. They are simply following standard industry income guidelines set forth by Fannie Mae and Freddie Mac. I have take numerous Calculating Self Employed Income course over the last decade. This has always been handled the same way in each course.

It is critical for you to understand that IRS guidelines and mortgage industry guidelines are not one in the same. Each industry has its own rules to follow. For line 24b of Schedule C, you will only see 50% of the actual expense incurred on this line. That is becasue the IRS assumes the the tax payer enjoyed part of the benefit of the meals and entertainment and will not allow a 100% deduction of the actual amount.

In reality, the borrower did incur 100% of the expense, not just the 50% that is listed on line 24b of Schedule C. For instance, if line 24b was $2,500, then the actual incurred expense was really $5,000. This would be what your lender is doing since the $5,000 was the true expense amount, not the tas deductible amout of $2,500.

Below is the link to the Freddie Mac Income Calculation form. You can see on it where the Meals and Entertainment amount is deducted from the income. That then allows for 100% of the actual expense to be accounted for.

http://www.freddiemac.com/learn/lo/forms/form_91.html

Fannie Mae's form does the same thing.

https://www.fanniemae.com/content/guide_form/1084.pdf


I have never heard of the government paying any industry anything as an allowance. An expense is an exepnse. The only distinciton is what part of that is tax deductible.

Regards,
Rodney Mason, NMLS #151088
Sr Loan Officer
Prospect Mortgage
825 Juniper St NE, Atlanta, GA 30308
Office: (404) 591-2453
rodney.mason@prospectmtg.com
Apply Online at http://www.rodneymason.com
Licensed in Alabama & Georgia with over a decade of mortgage lending experience.

Prospect Mortgage offers a full selection of mortgage programs including:
Conventional | FHA | FHA 580-639 FICO | FHA 203K Renovation (Streamline & Consultant) | HomePath® | HomePath® Renovation | HomeStyle® Renovation | VA | USDA | GA Dream | Jumbo Financing.
2 votes Thank Flag Link Wed May 15, 2013
As a truck driver I am receiving $59 for every day I am away from home. This is going directly to my pocket for food and meals which are actual not just another "tax deduction". End of the year I have $11.000 on what concerns my meals (Line 24b). If I made say $20.000 and the government was paying $11.000 then my Gross Adjusted Income, would be $31.000...
Bank says I am wrong on that. Let's play the game their way then. I made $30.000 minus $11.000, net $19.000. Then on top of that they deduct AGAIN the $11.000 and I am going down to $8.000 income. Reason: according to the IRS guidelines the Line 24b represents 50% so they have to deduct the other %50. Do you guys agree on that or not? That's my first question to follow the main one. Let's see how if you guys are so good as you claim. (I am not upset, yet when I do my job I do it responsibly and the same thing I expect from those that they lend money and take my money back and the same I expect from those that they gently criticize
Flag Wed May 15, 2013
Great answer.
Flag Wed May 15, 2013
Please keep in mind that IRS regulations DO NOT equal mortgage industry guidelines. The mortgage industry does not rely on the IRS to give it direction as to how to calculate income for repayment of a mortgage loan.

There are no mistakes being made by anyone. Most people in our industry have now been at this for many years. Of course, some are always going to be more knowledgeable than others.

Please re-read the 2nd to last paragraph of my previous answer: "For lending guidelines to be met, you would have to prove that the amount on line 24b was 100% of the amount of the actual expenses and not the normal 50% that is standard. Of course, the Underwriter ALWAYS has the final say in what is use as Qualifying Income."

If you are in fact able to prove the 80% amount and the 100% values, then only the 20% diffference will be deducted from your income to determine your Qualifying Income.

The fact that remains is that 100% of the Meals and Entertainment expenses will always be deducted from your income. There is absolutely no way that lending guidelines will allow that the M&E amount will not be deducted if that is what you are trying to get to.

Unless you are very tight on your debt to income ratio or if you have a very high line 24b amount, that 30% difference should not make a huge impact on your qualifying. Since you are so insistent, I assume one or both of those two apply to you.
1 vote Thank Flag Link Thu May 16, 2013
There are way too many variables at play for anyone to give you an accurate answer on numbers without seeing the entire picture AND the supporting documentation (i.e. your pay stubs, W-2's/1099's, Federal Tax Returns, etc). Also, no one knows if you are a W-2 employee or a 1099 contractor. Since you appear to have a Schedule C, I would assume a 1099 contractor.

If you have $11,000 on line 24b, then lending guidelines require $11,000 to be deducted from your "Net Profit" on line 31. If there is any depletion or depreciation on line 12 or 13, those amounts can be added back in. The same is true for Business Use of your home on line 30.

Rough way is :
Line 30 + Line 12 + Line 13 - Line 24b + Line 30 = Qualifying Income

There are additonal rules regarding averaging and declining income to be followed as well.

Line 24b should only contain the amount of the meals and entertainment that you actually incurred. It should not be a $59/day amount unless you actually spent $59/day on meals and entertainment. Expenses for actual travel would go on line 24a and are not subject to further reducing your income.

If your net annual income was determined to be $30,000, then your actual Qualifying income would be $19,000.

The government doesnt "pay" a truck driver anything unless you are an actual state or federal employee or you work as a civilian contractor. Only then would the government "pay" you anything. IRS regulations allow for meals and entertainment to reduce yout taxable income, but that is where it stops and that amount is limted to 50% of the actual expenses..

If you are a W-2 employee and your employer directly reimburses you for actual M&E expenses, then I would not see why that amount would be on line 24b.

For lending guidelines to be met, you would have to prove that the amount on line 24b was 100% of the amount of the actual expenses and not the normal 50% that is standard. Of course, the Underwriter ALWAYS has the final say in what is use as Qualifying Income.

I analyze tax returns nearly every single day and have been doing that for many years now. Calculating income for someone is usually not very difficult when you have the proper supporting documentation.
1 vote Thank Flag Link Wed May 15, 2013
Hiram, here's the reason you are having issues. Most underwriters are clueless, they need guidance forms. Whenever they receive a file, they open the guideline book and then use the necessary FNMA/FHLMC self employed or whatever analysis tools. The tool in your case is the self employed schedule C borrower and the fnma form mandates that the underwriter subtract from Net Income, the amount deducted for meals and entertainment. However, they can also use their own judgement and understand the fact that FNMA is only their guideline and this 50% deduction is used because it applies to the majority EXCEPT certain industries like yours. FNMA is not making this 50% deduction a must, it's simply helping the underwriter calculate accurately and would expect the underwriter to over rule this 50% rule when necessary as in your case. They should only be deducting 20% at the max unless you can prove the amount showing for meals and entertainment is 100% deductible. But as I said most underwriters are clueless and cannot handle accepting risk for signing off on common sense and thus my friend you are wasting your time trying to educate the uneducated. This is why you don't deal with banks and so called 'direct lenders'. Find yourself a good mortgage BROKER who will not only get you a loan, but one with far better terms than any bank or direct lender can or will offer you and with better service.

There problem solved. Conclusion, let your mortgage broker educate the lending management and they will direct the underwriter accordingly.

Another thing to consider is asking the accountant to not list as meals and entertainment, this sounds like travel expenses and those are fully deductible.
0 votes Thank Flag Link Thu Aug 6, 2015
Hi Hiram, my name is Mariana and I am a mortgage broker in Park Ridge, IL. 70 % of my clients are individuals in the same line of work as yourself. I absolutely confirm your statement that You are in title to deduct 80% of your entire amount spent for meals and enterntaiment , but unfortunately most lenders don't want to look outside of the box. Nowhere in Fannie Mae guide is stated the percentage amount thatust be deducted, . How funny I am working on a loan with exact same scenarios snd having the same problem -- with Flagstar Bank-- even got management involved. So far no luck. But , can assure you I have been succesfuly closing with other lenders - such as Impac mortgage . So , you do have a valid point and will be able to get your loan done with the right lender and loan officer. This is what I am doing- fighting for it... Good luck to you.
0 votes Thank Flag Link Wed Oct 8, 2014
This is an aollowance given to truckers to cover meals that our companies do not cover while we are on the road.....form 2106 meals line is an allowance and unfortunately all mortgage lenders seem to not see it as an allowance but as a deduction carried over to form A for our expenses....unfortunately as truckers we are condemned for taking a hand out from the government for being on the road providing clothing and food for these inconciderate underwriters and lenders!!!
0 votes Thank Flag Link Thu Dec 5, 2013
I can get it done for you

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0 votes Thank Flag Link Thu Jun 20, 2013
I do understand all things you wrote Rodney.
You are correct to all the assumptions you made.
There is one thing you are wrong and unfortunately you commit the same mistake the underwriter does:
I am a truck driver and I am NOT subject to the 50% rule:

"Individuals subject to “hours of service” limits. You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. The percentage is 80%.
Individuals subject to the Department of Transportation's “hours of service” limits include the following persons.
Interstate truck operators and bus drivers who are under Department of Transportation regulations."

(Source: IRS official webpage:
http://www.irs.gov/publications/p463/ch02.html#en_US_2012_pu…)

To all of you guys my question remains: you have any doubts now that they calculate me wrong?
INDEED there are many things that make the full picture, but when they tell you: "we do our loans based on the IRS guidelines and we have to go by deducting 50%" you prove them that they are wrong not because I say so, but always ACCORDING TO THE IRS and they insist that they are right, then either they are blind, or too egoists to admit they are mistaken or they are simply amateurs. One thing I know though is that the law applies to all of us. The law is the same for all of us. It doesn't favor a bit more the bank's side just because they are the bank. The law is the law and just because they are a bank it doesn't mean that the laws don't apply to them or that they apply only as they see fit and in accordance to their interests.
If any of you still disagree that I am still under the 50%, I am here to listen to you guys. I spoke with proofs not thoughts, allegations, assumptions, conclusions, experience but with FACTS. Waiting for yours...
0 votes Thank Flag Link Wed May 15, 2013
Hiram - you're making this very confusing. Rodney gave a very good answer. The IRS isn't a lender & doesn't give Fannie Mae & Freddie Mac their guidelines.

You can post strange rambling questions all you want...it won't change income guidelines.
0 votes Thank Flag Link Wed May 15, 2013
Do income guidelines say or say not that there is certain way of calculating Line 24b meals and entertainment?
Since you are avoiding to answer and you simply criticize me then you, that you are a professional, answer me that simply question (because fannies and freddies go by what the IRS guidelines say on what concerns the income). So answer me that simple question please...
Flag Wed May 15, 2013
As a truck driver I am receiving $59 for every day I am away from home. This is going directly to my pocket for food and meals which are actual not just another "tax deduction". End of the year I have $11.000 on what concerns my meals (Line 24b). If I made say $20.000 and the government was paying $11.000 then my Gross Adjusted Income, would be $31.000...
Bank says I am wrong on that. Let's play the game their way then. I made $30.000 minus $11.000, net $19.000. Then on top of that they deduct AGAIN the $11.000 and I am going down to $8.000 income. Reason: according to the IRS guidelines the Line 24b represents 50% so they have to deduct the other %50. Do you guys agree on that or not? That's my first question to follow the main one. Let's see how if you guys are so good as you claim. (I am not upset, yet when I do my job I do it responsibly and the same thing I expect from those that they lend money and going to take my money back and the same I expect from those that they... gently criticize here). You have the question guys, let's hear your answers...
0 votes Thank Flag Link Wed May 15, 2013
That was a great answer Rodney. :)
0 votes Thank Flag Link Wed May 15, 2013
As a truck driver I am receiving $59 for every day I am away from home. This is going directly to my pocket for food and meals which are actual not just another "tax deduction". End of the year I have $11.000 on what concerns my meals (Line 24b). If I made say $20.000 and the government was paying $11.000 then my Gross Adjusted Income, would be $31.000...
Bank says I am wrong on that. Let's play the game their way then. I made $30.000 minus $11.000, net $19.000. Then on top of that they deduct AGAIN the $11.000 and I am going down to $8.000 income. Reason: according to the IRS guidelines the Line 24b represents 50% so they have to deduct the other %50. Do you guys agree on that or not? That's my first question to follow the main one. Let's see how if you guys are so good as you claim. (I am not upset, yet when I do my job I do it responsibly and the same thing I expect from those that they lend money and going to take my money back and the same I expect from those that they... gently c
Flag Wed May 15, 2013
Hiram,

I hate to say it but they don't care. When one of the "big banks" sees something in a file that they don't understand they get extremely conservative and often will even deny a loan. The mentality of the underwriters, per executive direction, is CYA they feel it’s better to deny 100 quality loans than to approve 1 outside of guidelines. What you need to do is try and talk with the underwriter directly or the underwriting manager to get clarity on the issue and try to assuage their concerns with documentation that proves their error. What they need is a solid reason they can fall back on if their decision is questioned when the file is either audited or insured. If you’re dealing with a big bank you may not be allowed to talk with anyone in underwriting. If the loan is declined because of these reasons you need to find a lender that will be willing to do a little work to make sure your income is acceptable per guidelines. Good Luck.

Chris Irvin
Mortgage Banker
Brand Mortgage
NMLS #75615/465546
678-251-7889
cirvin@brandmortgage.com
http://www.chrisirvin.com
0 votes Thank Flag Link Wed May 15, 2013
I jsut reviewed a 1040 form. 24 referrs the viewer to form 2106 or 2106EZ.. Item 24 refers to expenses. If it is not an expense, the 2106 will show that. Why are you waisting your time trying to get a specific lender to accept you. There are hundreds of us in the Atlanta area. Go to someone who can understand your tax returns.

Sally

Sally W. Hamby
Senior Mortgage Banker
Fidelity Bank Mortgage
Sally.hamby@lionbank.com
404 644 7696
NMLS # 35143
0 votes Thank Flag Link Wed May 15, 2013
I think you are looking at Line 21 on page 2 of the 1040 instead of what he is talking about. He was referring to Line 24b on Schedule C for Deductible Meals and Entertainment.
Flag Wed May 15, 2013
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