Underwriter wants to count payment against me..

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Underwriter wants to count payment against me..

Samantha Klein
Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes

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...

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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y

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.

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  • Samantha Klein
    OP
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    9y

    @Mark Merdita My properties do show positive cashflow, the issue is the underwriter said they needed to show positive cashflow equal to or greater than my monthly payment which I know is not the correct way of doing it. 

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  • Mark Merdita
    Detroit, MI · Member since 2016 · 9 posts · 3 votes
    9y

    @Samantha Klein Have you looked at your Schedule E?

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  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    9y

    @Samantha Klein

    The way @Mark Merdita, described is how my lender calculated it as well. As I said, all lenders do it differently. As long as they are not less stringent than the Fannie Mae/Freddie Mac guidelines they are free to apply overlays as they please. And if it is a portfolio loan, they can do whatever they want as long as it isn't illegal. What Mark described is, in fact, the most accurate way to calculate your ability to carry the debt. It does not double count anything and mitigates some of the artificialities that may be in your Schedule E.

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  • Samantha Klein
    OP
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    9y

    @Mark Merdita Would you mind sending me a message? I am confused about the method you're using and would like to understand it better. Thank you!

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  • Nelson Barss
    Syracuse, UT · Member since 2016 · 21 posts · 27 votes
    9y
    Mark's description is exactly the way we calculate rental income as do all Fannie Mae underwriters. Here is a stab at a logical way of looking at it. On a schedule E you are reporting your income to the irs, and at the same time deducting your expenses. Some expenses are cash expenses (maintenance, etc.) and some are non-cash expenses (such as depreciation.) At the bottom of the worksheet you have net income. The underwriters goal is to start with that "net income" and manipulate it in 2 ways. 1. They want to add back all of the non-cash expenses like depreciation, amortization, etc. 2. They will also add back all expenses that are already part of your mortgage payment (because the mortgage payment is already being factored into you debt ratio, so this avoids being hit with it twice). So in this step they are adding back things like insurance & interest expense. Once the above 2 steps are complete the underwriter has an "income" figure that they can lump together with all of your other income. This also allows them to lump the debt Payment together with all of your other debts, and then calculate your debt to income ratio for the overall file. I suspect that the other requirements the lender is stating are either over-simplified ways for originators to understand it (or explain it), or some kind of overlay that can be avoided by choosing s different lender.
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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Samantha Klein:

    @Mark Merdita My properties do show positive cashflow, the issue is the underwriter said they needed to show positive cashflow equal to or greater than my monthly payment which I know is not the correct way of doing it. 

    Likely you have Conventional loan on a SFR. If you had a Commercial loan, you would have to jumped the DSCR hurdle (Debt Service Coverage Ratio)

    DSCR = NOI / mortgage payment and the lenders typically require 1.2-1.3 today

    So yes, the cash flow must be greater than the mortgage payment.

    Frankly, that's a great metric to determine profitability IMO.

    2Reply
  • Brian Person
    Investor · Columbus, OH · Member since 2016 · 28 posts · 10 votes
    9y

    Hello @Samantha Klein, @Chris Mason is correct. I was a mortgage lender for four years before I had to take a medical leave, which is when I jumped into the investment side. You should mark the property as a rental on the verification of mortgage page and then use the schedule E to calculate the rental profit/loss. @Mark Merdita used the correct calculation, however, i knew plenty of underwriters who did not calculate this correctly and had to be fixed. At the time I had rental calculators that I would give to the underwriters to make sure we were on the same page. 

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  • Brian Person
    Investor · Columbus, OH · Member since 2016 · 28 posts · 10 votes
    9y

    Here is the best way to calculated rental income. This is from the Fannie Mae worksheet. 

    From Schedule E

    Rents Received (line 3)

    - Total Expenses ( line 20)

    + Insurance expense (line 9)

    + Mortgage Interest ( line 12)

    + Taxes (line 16)

    + Depreciation ( line 18)

    This would equal your adjusted rental income. Then divide number by 24 to get monthly come. Then subtract your PITIA to get Monthly qualifying income or loss.

    Here is the link
    https://www.fanniemae.com/content/guide_form/1038....

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    Time for a different lender with a different underwriter.....
    2Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    9y

    @Samantha Klein - What @Mark Merdita and @Chris Mason are saying is how it should be done.  It is not as simple as taking the net income on your taxes and dividing it by 12 = monthly profit and loss.  There is a formula they use because your Schedule E only takes out interest paid, not your principle payment and depreciation is not counted.  Here is a calculator my bank gave me

    https://www.biggerpockets.com/files/user/chicagobr...

    If your lender is not doing it that way, find another lender who is experienced working with investors.  

    @Natalie Kolodij - A schedule E allows for a write off on taxes, insurance, interest, HOA.... just not principle. So when calculating net income for loan purposes we add those 4 things back in (plus depreciation) and then take out the PITIA payment. So in your example about A is correct, her net income would be $5,200 but in part B you would not count the PITIA payment in the debts because it was already deducted from the income as part of the "net income"

    I own 30 rental properties and 1 personal residence. This is how every lender I have ever worked with does it. I pay over $20k a month in PITIA payments, so trust me... I would be screwed and nobody would ever lend to me if it was done that way! So when I go to apply for a loan my DTI is calculated like this:

    W-2 income + Net rental income from 30 rental properties (see calculator Chris shared or the one I posted) = Total income

    Total Income / 12 * .45 = max monthly payment

    Max monthly payment - personal residence PITIA and monthly debts = max loan payment

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Natalie Kolodij - A schedule E allows for a write off on taxes, insurance, interest, HOA.... just not principle. So when calculating net income for loan purposes we add those 4 things back in (plus depreciation) and then take out the PITIA payment. So in your example about A is correct, her net income would be $5,200 but in part B you would not count the PITIA payment in the debts because it was already deducted from the income as part of the "net income"

    I own 30 rental properties and 1 personal residence. This is how every lender I have ever worked with does it. I pay over $20k a month in PITIA payments, so trust me... I would be screwed and nobody would ever lend to me if it was done that way! So when I go to apply for a loan my DTI is calculated like this:

    W-2 income + Net rental income from 30 rental properties (see calculator Chris shared or the one I posted) = Total income

    Total Income / 12 * .45 = max monthly payment

    Max monthly payment - personal residence PITIA and monthly debts = max loan payment

     Thank you for breaking this out! That's the part I was missing. I was like if they just take your Tax returns and /12 it's missing all the principle your responsible for. This makes way more sense thank you. 

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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    Also what has not been mentioned here is your debt service coverage ratio. Schedule E they certainly look at, but you also need to have a dscr of 1.25 to be considered break even. Below that and it will add to your DTI and schedule Elvis can further add to your dti. So say the PITI is $1,000...then you need a rent of $1250 to be considered break even.

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  • Carlos Saenz
    Real Estate Agent · Washington, DC · Member since 2008 · 3 posts · 0 votes
    7y

    I am purchasing a home in LA and applying for a CitiBank mortgage. I have a loan in my name only on another property. An LLC that I am not affiliated with ( brother's LLC ) has been making perfect mortgage payments for over 5 years. The lender is using that DTI against me even though I have submitted 24 month bank statements proving such. Id they don't give me the exception to not include the loan payment should they not at least give me credit for the rental income coming in towards that loan payment even though it is going to an LLC? They can't have it count against me without giving me credit correct ?

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  • Carlos Saenz
    Real Estate Agent · Washington, DC · Member since 2008 · 3 posts · 0 votes
    7y

    I am purchasing a home in LA and applying for a CitiBank mortgage. I have a loan in my name only on another property. An LLC that I am not affiliated with ( brother's LLC ) has been making perfect mortgage payments for over 5 years. The lender is using that DTI against me even though I have submitted 24 month bank statements proving such. Id they don't give me the exception to not include the loan payment should they not at least give me credit for the rental income coming in towards that loan payment even though it is going to an LLC? They can't have it count against me without giving me credit correct ?

    0Reply
  • Jared Kuntz
    Member since 2021 · 2 posts · 0 votes
    5y

    THis is an old thread.  Is there anyone on here that can help explain this for me?  I may need to chat with someone directly.  

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  • Jared Kuntz
    Member since 2021 · 2 posts · 0 votes
    5y

    Essentially I have a $1097 PITI on an investment property. They add that to my schedule E and it shows a -$797 according to their worksheet (1038). I understand that, but they are saying my DTI includes the $1097 AND the $797. So in essence it is like there is $1894 for this one property counting against my DTI.

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