Underwriter wants to count payment against me..

37 Replies

Let's say you show a $500 annual profit after deprecation on your rental property on your taxes, wouldn't the lender divide that $500 by 12 and add that to your monthly income? I'm trying to figure out how much to claim in expenses this year on 1 property because my lender is telling me that for example, if my mortgage payment is $456, I need to make at least $456 a month in profit on my taxes, and I have never heard of that. I always thought even if show a loss on your taxes, let's say $1,200, the lender would divide by 12 and use $100 a month added to your debt side, am I right or is the underwriter? The underwriter wants to count the whole payment against me...

It's an expense...so yes it reduces your income on your taxes. 

If you rent for $1000  a month, and your mortgage is $1000 a month....you make $0 a month. There is no income to utilize towards qualifying for a new property. 

The mortgage payment is part of the calculation to determine the annual profit. Not divided and applied after. 

The lender is just going to look at the annual profit from a rental. If your profit for the year is $500 that divided by 12 means you get to add $41.66 to your qualifying monthly income for DTI calculations and such

So I am correct and the underwriter is not calculating it correctly? It doesn't make sense that if I claim the interest, taxes and insurance on my taxes that they'd want to count it against me if the property is making a profit, that shows the property covers the debt without a problem, for example, say you are getting $1,000 a month and your mortgage payment is $700, so you make $300 a month before repairs, maintenance. If you use the underwriter's way, I would have to profit $700 a month on my taxes for the whole payment to not count against me, that is almost going to be impossible unless you're buying for 2% ratio 

I'm not sure what you mean for "the whole payment to not count against me" 

Are you trying to utilize rental income from a current rental you own to get qualified to buy a new one? Or are you trying to utilize rental income on like  a duplex to qualify for purchasing the duplex? 

Thanks @Chris Mason This is what I'm trying to get the lender to understand and follow, I assume this lender doesn't do many investment loans.

I think we've got two sides to this.....

A. Determining how much you can add to your income as qualifying rental income- Chris' spreadsheet he shared nailed it. 

So say Step 2B of that results in $200 a month qualifying rental income 

And say your normal w2 job income is $5k a month. With the net rental income it's now $5,200 a month to qualify with. 

-------------------------------------

B. Now your debt side. 

The entire monthly mortgage still counts for your DTI calc. The required payment is still required debt payment . But the net income does get to count on the income side. (box 2b from his spreadsheet)

Say you have your primary mortgage at $1,500 a month, a car loan at $500 a month, and the mortgage for this property at $700 a month.  = $2,700 a month required debts

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DTI= 52% = $2,700/$5,200

They're two different calculations. 

Originally posted by @Samantha Klein :

Thanks @Chris Mason This is what I'm trying to get the lender to understand and follow, I assume this lender doesn't do many investment loans.

 I think your lender is correct. 

Your mortgage payment counts toward required debts for the calculation. 

The calculation from the spreadsheet only tells you how much Income you get to add to the Income side of the DTI calc.

@Natalie Kolodij I don't see how the original PITI payment would count because it would already be used in the formula to determine the monthly profit or loss, so the way you are trying to calculate it, you'd be counting it twice.

Because you don't count PITI in your tax calculation

Only your mortgage interest is tax deductible. 

And it's for two totally separate things. 

So I guess my calculation was off because I used the same thing for both. But only your interest portion gets deducted (see the spreadsheet) 

That is how you calculate the income. It gets added to your Qualifying income. 

How many loans you have and your minimum payments of each don't change.  These are always going to be two separate things. Your monthly/annual income and loss is totally unrelated to how much you're REQUIRED to pay. 

One's a tax calculation. One's then just a summary of your debts. 

The 1040 Sch E has it all broken out and brings forward a net P/L on the rental.

If the Sch E is a loss, just what do you expect the underwriter to do?

Originally posted by @Natalie Kolodij :

I think we've got two sides to this.....

A. Determining how much you can add to your income as qualifying rental income- Chris' spreadsheet he shared nailed it. 

So say Step 2B of that results in $200 a month qualifying rental income 

And say your normal w2 job income is $5k a month. With the net rental income it's now $5,200 a month to qualify with. 

-------------------------------------

B. Now your debt side. 

The entire monthly mortgage still counts for your DTI calc. The required payment is still required debt payment . But the net income does get to count on the income side. (box 2b from his spreadsheet)

Say you have your primary mortgage at $1,500 a month, a car loan at $500 a month, and the mortgage for this property at $700 a month.  = $2,700 a month required debts

------------------------------------------

DTI= 52% = $2,700/$5,200

They're two different calculations. 

Hi Natalie,

I think you're mashing together the way it works for owner occupied multi unit properties, and non-owner occupied pure investment properties appearing on tax returns, and non-owner occupied pure investment properties that are the subject property. :)

If it's a pure rental property appearing on tax returns that is no the subject property, and rental income offsets PITI according to that spreadsheet, qualifying income is added, and PITI is excluded from the debts column.

@Jeff B. She feels like it's being double counted. I think the issue is that they're 2 things. Your income/loss that happens to include a mortgage interest deduction- is totally unrelated to your minimum mortgage payment and it's effect on your DTI

Hi Natalie,

I think you're mashing together the way it works for owner occupied multi unit properties, and non-owner occupied pure investment properties appearing on tax returns, and non-owner occupied pure investment properties that are the subject property. :)

If it's a pure rental property appearing on tax returns that is no the subject property, and rental income offsets PITI according to that spreadsheet, qualifying income is added, and PITI is excluded from the debts column.

So your mortgage payments on rental properties you own (not occupy) DO NOT account toward the DTI limitations lenders look for?

@Natalie Kolodij the DTI is on the residence; the sch-e is on the rental where DTI is of no concern.

The personal mortgage interest deduction is on the Itemized Deductions and related only to the personal residence.

In any case - - consult a CPA and learn the correct means of accounting for a rental.

@Natalie Kolodij That's correct how I understand it, if you show a net profit on Sch E on your tax return, it helps your DTI because the mortgage payment is NOT counted as your debt because it's already been factored in the profit/loss on the sch E, however if you show a loss, it just gets added to the debt side, once again the whole payment wouldn't get added to your debt side because it's already been factored in.

Originally posted by @Jeff B. :

@Natalie Kolodij the DTI is on the residence; the sch-e is on the rental where DTI is of no concern.

The personal mortgage interest deduction is on the Itemized Deductions and related only to the personal residence.

In any case - - consult a CPA and learn the correct means of accounting for a rental.

I AM a tax accountant. I'm well aware on how to account for a rental. I'll be a CPA in the next few months. 

I'm not sure where you concluded I was referring to her Schedule A deduction. 

On your schedule E....for your rental properties....one of the things you get to deduct is the mortgage interest on that property. 

I do not work in lending. That's why I was questioning and found it surprising that your total monthly mortgage payments for all properties, both primary and investment, didn't count as monthly debt in your DTI calculation when you're trying to get approved for an additional mortgage.

Hi @Natalie Kolodij ,

The PITI and other actual expenses are accounted for when we subtracted them from gross rent, to arrive at our net income number.

That's why you can make a relatively modest income, own eleven properties with eight mortgages across them, and have your DTI (CORRECTLY calculated) be something like...

His DTI would be like 250% or something crazy if it was calculated how you were suggesting, which is in fact how some LOs will do it and then tell a REI that "your DTI is too high, you don't qualify"... well, yeah, because the math was done wrong. Their DTI is fine, it's the dang LO who is the one that isn't qualified.

@Chris Mason I tried to convince two lenders that counting all mortgage payments as debt and only the net income from Schedule E as income is wrong, but they wouldn't listen - they just said the formula is clear, add all income as shown on the tax return and add all debt as shown on credit report, and then divide one by the other... My DTI is astronomical so I do not qualify. I applied with a third lender for a HELOC, he asked me what the purpose of the loan would be, and I told him I plan to renovate a rental property I just purchased. Got rejection letter saying that the loan cannot be approved for business purpose... Emailed him that I changed my mind and I will blow it all on a fancy vacation and a big screen TV, to please reconsider my application :) I do not expect a reply. Dealing with lenders can be frustrating.

@Samantha Klein I think I know what your lender is talking about. When it is calculating your DTI it is taking that entire payment towards your debt service payments, because as such if the property was vacant you would be responsible for that payment along with all your other expenses. As such if it is rented, and you provide a copy of the lease, they should then add the rental income to your W4 income into your total income calculations. For example when I refinance, they take my new calculated payment to add to my debt side, and look at my Schedule E gross rent to add to my income side. Depreciation, taxes, and other expenses are not normally factored in that calculation in my experience from a lending perspective. Hope this helps.

I hate to break it to you but the underwriter is probably right and just not explaining it to you in a clear way. I despise underwriters but they tend to be very good at their jobs. They know how to run the numbers, unlike a loan originator, who doesn't know squat. First thing I would say is make sure you are actually talking to the underwriter and not an originator. The originator probably only knows half truths and hearsay and is parroting things he has heard but doesn't fully understand.

I just went through this and it took me a while to understand what the underwriter was doing because all lenders do it differently. I have had them just take 75% of my rent and apply it to the payment and I have had them take my last two years of tax returns and do like you said, add back depreciation and divide by twelve. This last lender was taking my last two years of tax returns and adding back depreciation, taxes, insurance, and mortgage interest and then applying what was left divided by twelve to the entire mortgage payment. Bottom line, they didn't care how my properties were performing, they wanted to make sure that I could afford the payment. It is all about cash flow to them and there are a lot of things on your schedule E that can cloud what your actual cash flow is. Sometimes that can work against you but it can also help as well. What if you made the tax payments for two years in one? That artificially lowers your schedule E for that year but does not impact your overall cash flow long term.

I actually got them to send me the spread sheet they were using. It is complex, but I was able to reverse engineer it to figure out what they were doing. Bottomline, it is not unheard of that he may be an idiot, but odds are he is just not explaining the process to you correctly.

@Samantha Klein You can do the math yourself by looking at schedule E from your 2014 and 2015 tax returns and computing the following:

  • Add the following lines:
    • Line 9 (Insurance)
    • Line 12 (Mortgage Interest)
    • Line 16 (Taxes)
    • Line 18 (Depreciation)
    • Line 19, if applicable (HOA Dues)
    • Line 21 (Income or Loss)
  • Divide by 24 (If only the most recent 1 year's 1040s are required, then divide by 12)
  • Subtract PITIA (Principal, Interest, Taxes, Insurance, monthly HOA) to determine net monthly rental income.
  • I can assure you the underwriter is calculating it correctly because lenders use rental calculators to make it very simple. The schedule E tells the story. The one exception is if the lender will allow you to use rental income that doesn't yet show up on your previous year's tax return. In this case they will likely use Monthly Rent (evidenced by signed lease agreement) times a percentage for Vacancy Factor (Most lenders use 25% vacancy factor and deduct it from your yearly rent) then they subtract the PITIA payment to find the usable income.

    @Mark Merdita The way @Chris Mason explained it is the way I was always told, and the way that makes sense because as stated, the monthly mortgage payment is already used to determine the net profit or loss and therefore would not be added a 2nd time to the DTI calculation because then naturally nobody could qualify for a loan because it would push DTI very high. How else would you explain people making 70-80k a year that have 8 mortgages on rentals and are still able to qualify for more.

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