Underwriter wants to count payment against me..

37 Replies

@Samantha Klein The payment is not being added a second time It is only added once in the calculation. Also, to your point...The conservative calculations lenders use are the exact reason it's difficult to have multiple mortgages without showing profit on your schedule E from each. All the more reason to make your properties cash flow positive.

@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. 

@Samantha Klein Have you looked at your Schedule E?

@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.

@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!

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.

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.

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. 

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....

Time for a different lender with a different underwriter.....

@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


@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. 

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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