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With the new 2018 Tax Cuts and Jobs Act, determining cash flow from personal income tax returns is as challenging as ever. Tax returns show taxable income. But borrowers don’t repay debt with taxable income; they use cash flow. The trick 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 a cash flow statement using the free software included with this course. Part 1 will cover the front page of Form 1040, Schedule A (Itemized Deductions), Schedule B (Interest and Dividend Incomes) and Schedule C (Sole Proprietorship Incomes). (Note: This method does not follow Fannie, Freddie, or QM rules used in mortgage lending.)
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