Freddie Mac Single-Family Seller/Servicer Guide 5306.2 — Automated income assessment using tax data for rental income

This section contains: ■ Overview ■ Eligible and ineligible rental income ■ Underwriting requirements ■ Data submission requirements ■ Representation and warranty relief eligibility and documentation requirements ■ Other provisions related to rental income

(a) Overview Asset and income modeler (AIM) automated income assessment using tax data provides Sellers with the option to use certain Systems (as defined in Section 2401.1(b)) to determine whether the Seller is eligible for relief from enforcement of certain representations and warranties related to the Borrower’s rental income. The Seller must obtain the Borrower’s tax data and submit all required data and information to the applicable System. Based on the data submitted, the System will assess for representation and warranty relief eligibility and return the results of the assessment. The method to calculate income assessed by the applicable System may differ from income calculated using the methods described in Section 5306.1. Representation and warranty relief eligibility is contingent on the Seller’s compliance with the requirements of this section. References in this section to “service provider” mean a third-party service provider designated by Freddie Mac. (i) Tax returns uploaded to a service provider If the Seller obtains the Borrower’s complete federal income tax returns (Internal Revenue Service (IRS) Form 1040, including Schedule E), the Seller will upload the tax returns to a service provider, which will produce a report (“Income Calculation Report”) consisting of data extracted from the Borrower’s tax returns. The Seller may also request from the IRS, via the service provider, a tax transcript of the Borrower’s tax return(s). If both tax returns and tax transcripts are obtained, Loan Product Advisor® will compare data from the Borrower’s tax return to data from the tax transcript for assessment of tax return data representation and warranty relief eligibility and return the results of the assessment on the Feedback Certificate. (ii) Tax transcripts obtained from a service provider Alternatively, the Seller may request from the IRS, via a service provider, a tax transcript of the Borrower’s tax return(s). Loan Product Advisor will retrieve the tax transcript data from the service provider, assess for income and data representation and warranty relief eligibility and return the results of the assessment on the Feedback Certificate. (iii) Freddie Mac Income Calculator using tax return or tax transcript data When data from the Borrower’s complete federal income tax returns (IRS Form 1040 and Schedule E) or tax transcripts is submitted into the Freddie Mac Income Calculator, a Freddie Mac Income Calculator Certificate is produced that details the results of the Freddie Mac Income Calculator submission, including the calculated income and representation and warranty relief eligibility for income and data, if applicable.

(b) Eligible and ineligible rental income (i) Eligible rental income Rental income generated from the following property and occupancy types reported on the Borrower’s IRS Schedule E of the tax return(s) or tax transcript(s) is eligible for an automated assessment using tax data: ■ Subject or non-subject 2- to 4-unit Primary Residence (rental income is eligible from units not occupied by the Borrower) ■ Subject 1- to 4-unit Investment Property ■ Non-subject investment property owned by the Borrower (not restricted to residential property (e.g., commercial property permitted)) Only rental income reported on the Borrower’s IRS Schedule E is eligible for an automated assessment using tax data. Note: Refer to Chapter 5304 for the treatment of all rental real estate income or loss reported on IRS Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, which reflects all income and expenses for the rental property, and IRS Schedule K-1, which reflects the Borrower’s proportionate share of the net rental income or loss. (ii) Ineligible rental income Rental income generated from the following is not eligible for an automated assessment using tax data: ■ ADU on a subject 1-unit Primary Residence ■ Live-in aide residing in a 1-unit Primary Residence (iii) Automated assessment eligibility for multiple income producing properties Rental income reported on IRS Schedule E of the Borrower’s tax transcript(s) is only eligible for an automated assessment when one rental income producing property is reported on the tax transcript(s). Rental income reported on IRS Schedule E of the Borrower’s tax return(s) is eligible for an automated assessment when one or more rental income producing properties are reported on the tax return(s).

(c) Underwriting requirements (i) General underwriting requirements The Seller must have no knowledge, information or documentation that contradicts an expectation that the rental income will continue for at least the next three years. (ii) Federal income tax return and tax transcript requirements The tax return(s) or tax transcript(s) used in the automated income assessment must be the Borrower’s complete federal income tax returns (IRS Form 1040, including Schedule E) that were most recently filed with the IRS. Sellers are encouraged to always confirm with the Borrower that the tax return(s) or tax transcript(s) provided are the most recent filed with the IRS. Section 5302.4(b) for the age of tax return requirements apply, including the requirement to obtain IRS Form 4868 when evidence of completed IRS tax filing extension is required. The tax returns must not be any of the following: ■ Filed on a fiscal year basis ■ Handwritten ■ An amended return ■ From a U.S. Territory If the Borrower has amended their tax returns, then tax transcripts are not acceptable for assessment through the applicable System. If using tax transcript(s), the assessment requires the most recent calendar year; a tax extension is not allowed. (iii) Inconsistent or contradictory information The Seller is responsible for investigating and resolving any inconsistent or contradictory information contained in the Income Calculation Report; the Freddie Mac Income Calculator Certificate; Form 92, Net Rental Income Calculations – Schedule E (or a similar alternative form); tax returns; tax transcripts; and/or the Mortgage file. Examples: ■ If the Seller determines that a property from which positive rental income is calculated is no longer owned, the Seller must exclude it from the qualifying income ■ If the Mortgage receives a tax return data representation and warranty relief result of “Not Eligible,” as described in Section 5306.2(e)(iii) below, due to inconsistencies between the tax transcript returned by the IRS via the service provider and the tax return(s) uploaded to the service provider, the Seller is required to resolve the discrepancy. If the Seller finds discrepancies, it must update the information in the applicable System and/or the Income Calculation Report and resubmit the data as necessary. Note: For Mortgages that receive a tax return data representation and warranty relief result of “Eligible” as described in Section 5306.2(e)(iii) below, Loan Product Advisor has compared the data from uploaded tax return(s) to data from IRS tax transcripts and has found the data to be consistent; therefore, for eligible rental income, the Seller is not responsible for investigating inconsistent information between these documents.

(d) Data submission requirements (i) Tax returns uploaded to a service provider When tax returns are obtained and uploaded to a service provider, the Seller must: 1. Review and verify the Income Calculation Report, if applicable, against information in the Mortgage file to determine if any adjustments must be made. If so, the Seller must update the Income Calculation Report and upload it to the service provider, along with any additional documentation necessary to support the updates 2. Submit the most current version of the Income Calculation Report to Loan Product Advisor. Loan Product Advisor will assess, on a property level basis, the calculation of income and/or losses from the eligible rental income based on data from the tax returns and the Income Calculation Report. Note: If the Income Calculation Report is updated or additional documentation is provided, the Seller must upload the updated report and/or documentation to the service provider and submit the updated information to Loan Product Advisor. 3. The Seller must enter in Loan Product Advisor in the Real Estate/Property You Own Section of the property information the rental property address as it appears on the IRS Schedule E of the Borrower’s tax return (ii) Tax transcripts obtained from a service provider When tax transcripts are obtained from a service provider and not used with the Freddie Mac Income Calculator, the Seller must submit the tax transcript data to Loan Product Advisor, which assesses, on a property level basis, the calculation of income and/or losses from the eligible rental income reported on Schedule E based on data from the tax transcripts. Note: When using tax transcripts, only one rental property reporting on the IRS Schedule E is allowed. Refer to Section 5306.2(b)(iii) above. The Seller must enter in Loan Product Advisor in the Real Estate/Property You Own Section of the property information the rental property address as it appears on the IRS Schedule E of the Borrower’s tax return. (iii) Freddie Mac Income Calculator using tax data When the Seller uses the Freddie Mac Income Calculator with tax data, the Seller must submit accurate tax return data or tax transcript data, as applicable, to the Freddie Mac Income Calculator, which will assess, on a property level basis, the calculation of income and/or losses from the eligible rental income. Note: When using tax transcripts, only one rental property reporting on the IRS Schedule E is eligible for an automated assessment. Refer to Section 5306.2(b)(iii) above. The Seller must enter in Loan Product Advisor in the Real Estate/Property You Own Section of the property information the rental property address as it appears on the IRS Schedule E of the Borrower’s tax return.

(e) Representation and warranty relief eligibility and documentation requirements (i) Representation and warranty relief overview Two types of relief from enforcement of representations and warranties are available through an automated income assessment using tax data. Eligibility for each type of the following representation and warranty relief is determined separately: ■ Income representation and warranty relief ■ Tax data representation and warranty relief, when applicable: ❑ Tax returns uploaded to a service provider: Data representation and warranty relief may be available when the tax transcript is requested via a service provider and Loan Product Advisor compares the data from uploaded tax returns(s) to data from the IRS tax transcripts ❑ Tax transcripts obtained from a service provider: Data representation and warranty relief may be available when the tax data is assessed by Loan Product Advisor If multiple Loan Product Advisor submissions are made, the Seller’s eligibility for representation and warranty relief will be based on the results on the Last Feedback Certificate. (ii) Income representation and warranty relief results on Feedback Certificate When income representation and warranty relief eligibility results are provided on the Last Feedback Certificate, the relief available is described in the following table: Income representation and warranty relief based on Feedback Certificate results Eligibility result Representation and warranty relief Eligible1 The Seller is relieved from enforcement of representations and warranties related to the accuracy of the income calculation for eligible rental income shown on the Income Calculation Report, the Freddie Mac Income Calculator Certificate or Form 92 (or a similar alternative form), as applicable. Partial1 When partial income representation and warranty relief is granted for a source(s) as confirmed by the feedback message, the Seller is relieved from enforcement of representations and warranties related to the accuracy of the income calculation for eligible rental income shown on Income representation and warranty relief based on Feedback Certificate results Eligibility result Representation and warranty relief the Income Calculation Report, the Freddie Mac Income Calculator Certificate or Form 92 (or a similar alternative form), as applicable. Not eligible The Seller is not eligible for relief from enforcement of representations and warranties related to the Borrower’s income. Exception: The Seller is relieved from enforcement of representations and warranties related to the Borrower’s income when a message is returned on the Freddie Mac Income Calculator Certificate indicating such relief. See table below titled “Income representation and warranty relief based on Freddie Mac Income Calculator Certificate result”. Unavailable The Seller is not eligible for relief from enforcement of representations and warranties related to the Borrower’s income. Exception: The Seller is relieved from enforcement of representations and warranties related to the Borrower’s income when a message is returned on the Freddie Mac Income Calculator Certificate indicating such relief. See table below titled “Income representation and warranty relief based on Freddie Mac Income Calculator Certificate result”. 1Evidence of continued income stability has been met for the rental income eligible for representation and warranty relief when the Seller obtains IRS Form 4868 confirming IRS tax filing extension. (iii) Data representation and warranty relief results on the Feedback Certificate When data representation and warranty relief eligibility results are provided on the Last Feedback Certificate, the relief available is described in the following table: Data representation and warranty relief based on Feedback Certificate result Eligibility result Representation and warranty relief Eligible Tax returns uploaded to a service provider The Seller is relieved from enforcement of representations and warranties related to the accuracy and integrity of the data from tax return(s) uploaded to the service provider for eligible rental income shown on the Income Calculation Report or Form 92 (or a similar alternative form). Tax transcripts obtained from a service provider The Seller is relieved from enforcement of representations and warranties related to the accuracy and integrity of the data from tax transcripts obtained from a service provider for eligible rental income. Not eligible The Seller is not eligible for relief from enforcement of representations and warranties related to the accuracy and integrity of the data from the tax return(s) uploaded to the service provider. Unavailable The Seller is not eligible for relief from enforcement of representations and warranties related to the accuracy and integrity of the data from the tax return(s) uploaded to the service provider. (iv) Income representation and warranty relief results on the Freddie Mac Income Calculator Certificate When income representation and warranty relief eligibility results are provided on the Freddie Mac Income Calculator Certificate, the relief available is described in the following table: Income representation and warranty relief based on the Freddie Mac Income Calculator Certificate result Eligibility result Representation and warranty relief Eligible1 The Seller is relieved from enforcement of representations and warranties related to the accuracy of the income calculation for eligible rental income shown on the Freddie Mac Income Calculator Certificate. Not eligible The Seller is not eligible for relief from enforcement of representations and warranties related to the Borrower’s income. 1Evidence of continued income stability has been met for the rental income eligible for representation and warranty relief when the Seller obtains IRS Form 4868 confirming IRS tax filing extension. (v) Data representation and warranty relief results on Freddie Mac Income Calculator Certificate When data representation and warranty relief eligibility results are provided on the Freddie Mac Income Calculator Certificate, the relief available is described in the following table: Data representation and warranty relief based on Freddie Mac Income Calculator Certificate result Eligibility result Representation and warranty relief Eligible Tax returns uploaded to a service provider The Seller is relieved from enforcement of representations and warranties related to the accuracy and integrity of the data from tax return(s) uploaded to the service provider for eligible rental income shown on the Income Calculation Report or Form 92 (or a similar alternative form). Not eligible The Seller is not eligible for relief from enforcement of representations and warranties related to the accuracy and integrity of the data from the tax return(s) uploaded to the service provider. Unavailable The Seller is not eligible for relief from enforcement of representations and warranties related to the accuracy and integrity of the data from the tax return(s) uploaded to the service provider. (vi) Documentation requirements based on representation and warranty relief result on Feedback Certificate When income representation and warranty relief eligibility results are provided on the Last Feedback Certificate, the Seller must maintain in the Mortgage file the income documentation indicated on the Last Feedback Certificate in lieu of other documentation required in Section 5306.1. Additional documentation requirements are described in the following table: Documentation requirements based on representation and warranty relief result on Feedback Certificate Eligibility result Income documentation requirements Eligible The Seller must maintain in the Mortgage file: ■ The most recent Income Calculation Report or Form 92 (or a similar alternative form), as applicable ■ The Borrower’s tax returns or tax transcripts as applicable in accordance with Section 5306.2(c)(ii) above ■ Documentation to support adjustments as described in Section 5306.2(d)(i) above, if applicable ■ All documentation submitted to the service provider, including the most recent uploaded Income Calculation Report used by Loan Product Advisor ■ IRS Form 4506-C in accordance with Section 5302.5. Note: IRS Form 8821 is an acceptable alternate form in lieu of IRS Form 4506-C. When Schedule E shows a reduced number of days in use as stated in a feedback message, the Seller must also maintain in the Mortgage file: ■ Documentation of significant repairs/renovations supported by repair/renovation expenses on Schedule E, or ■ Documentation to support that the property was purchased or converted to a rental property in the prior calendar year (e.g., acquisition date, conversion date). In addition, if significant repairs/renovation were performed, documentation is required to support repairs/renovation and repair/renovation expense must be reflected on Schedule E. Documentation requirements based on representation and warranty relief result on Feedback Certificate Eligibility result Income documentation requirements When there are multiple income sources and one or more is eligible for income representation and warranty relief, for the income source(s) not eligible for representation and warranty relief, the Seller must either: ■ Verify and document the income as required by the Guide, or ■ Remove the income and resubmit the Mortgage to Loan Product Advisor Partial The Seller must maintain in the Mortgage file: ■ The most recent Income Calculation Report or Form 92 (or a similar alternative form), as applicable ■ The Borrower’s tax returns uploaded to the service provider or tax transcripts as applicable in accordance with Section 5306.2(c)(ii) above ■ Documentation to support adjustments as described in Section 5306.2(d)(i) above, when applicable ■ All documentation submitted to the service provider, including the most recent uploaded Income Calculation Report used by Loan Product Advisor ■ IRS form 4506-C in accordance with Section 5302.5. Note: IRS Form 8821 is an acceptable alternate form in lieu of IRS Form 4506-C. When Schedule E shows a reduced number of days in use as stated in a feedback message, the Seller must also maintain in the Mortgage file: ■ Documentation of significant repairs/renovations supported by repair/renovation expenses on Schedule E, or ■ Documentation to support that the property was purchased or converted to a rental property in the prior calendar year (e.g., acquisition date, conversion date). In addition, if significant repairs/renovation were performed, documentation is required to support repairs/renovation and repair/renovation expense must be reflected on Schedule E. When there are multiple income sources and one or more income source(s) are needed to qualify the Borrower, document the income source(s) as required by the feedback messages. Documentation requirements based on representation and warranty relief result on Feedback Certificate Eligibility result Income documentation requirements Not eligible The income must be verified and documented as required by the Guide. Unavailable The income must be verified and documented as required by the Guide. (vii) Documentation requirements based on representation and warranty relief result on the Freddie Mac Income Calculator Certificate When income representation and warranty relief eligibility results are provided on the Freddie Mac Income Calculator Certificate, the Seller must maintain in the Mortgage file the income documentation indicated on the last Freddie Mac Income Calculator Certificate in lieu of other documentation required in Section 5306.1. Additional documentation requirements are described in the following table: Documentation requirements based on representation and warranty relief result on the Freddie Mac Income Calculator Certificate Eligibility result Income documentation requirements Eligible The Seller must maintain in the Mortgage file: ■ The Freddie Mac Income Calculator Certificate reflecting the calculated rental income amount for each property used to underwrite the Mortgage ■ The Borrower’s tax returns or tax transcripts as applicable in accordance with Section 5306.2(c)(ii) above ■ IRS Form 4506-C in accordance with Section 5302.5. Note: IRS Form 8821 is an acceptable alternate form in lieu of IRS Form 4506-C. Documentation requirements based on representation and warranty relief result on the Freddie Mac Income Calculator Certificate Eligibility result Income documentation requirements When Schedule E shows a reduced number of days in use as stated in a Freddie Mac Income Calculator Certificate message, the Seller must also maintain in the Mortgage file: ■ Documentation of significant repairs/renovations supported by repair/renovation expenses on Schedule E, or ■ Documentation to support that the property was purchased or converted to a rental property in the prior calendar year (e.g., acquisition date, conversion date). In addition, if significant repairs/renovation were performed, documentation is required to support repairs/renovation and repair/renovation expense must be reflected on Schedule E. When there are multiple income sources and one or more is eligible for income representation and warranty relief, for the income source(s) not eligible for representation and warranty relief, the Seller must verify and document the income as required by the Guide. Not eligible The income must be verified and documented as required by the Guide.

(f) Other provisions related to rental income (i) IRS Form 8825 Refer to Chapter 5304 for the treatment of all rental real estate income or loss reported on IRS Form 8825, which reflects all income and expenses for the rental property, and IRS Schedule K-1, which reflects the Borrower’s proportionate share of the net rental income or loss. The requirements of Chapter 5304 are applicable regardless of the Borrower’s percentage of ownership interest in the partnership or S corporation and regardless of whether the Borrower is personally obligated on the Note. (ii) Other Guide provisions related to rental income Refer to the following Guide provisions for additional information related to rental income: Other Guide provisions related to rental income Guide provision Guide location Appraisal form rental information Section 3401.2(h) Property eligibility and appraisal requirements Topic 5600