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What’s your decision-making process for qualifying a self-employed borrower for a loan? Do you understand how to convert tax income (which is practically useless) into cash flow? The key is learning how to obtain a reliable monthly or annual cash flow from a personal tax return. Incorrectly estimating cash flow from a tax return can result in bad loan decisions – or missed opportunities. Once you’ve properly converted taxable income into cash flow, that information can be used in your credit scoring model, debt-to-income ratio, or disposable income calculation.
Designed for consumer and commercial lenders, this two-part series will teach you an easy, reliable method to convert a borrower’s personal tax return (Form 1040) into annual and monthly cash flow statements using the free software included with this course. Part 2 will cover Schedule D (Capital Gains, Installment Sales, and other sales), Schedule E, Page 2 (Rental and Royalty income), Schedule E, Page 2 (Partnership and S Corporation income), and Schedule F (Farm income). (Note: This method does not follow Fannie, Freddie, or QM rules used in mortgage lending.)
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