Counting Rental income for new Mortgage
Reggie ReardenPro Member
Rental Property Investor · Aiken, SC · Member since 2019 · 129 posts · 44 votesI have a question regarding mortgages for personal property. I just heard from our lender that we have plenty of income to cover the new mortgage we want BUT they can not make it work on paper. I work a W2 job, own a couple of small businesses, have several properties, and my wife is self employed as a single member LLC. They can only use my W2 income because me and my wife do not takes draws from any of our other incomes, which are all LLC's. This is the first time we've tried to get a mortgage for our personal name since we've owned businesses and real estate. Any suggestions? This is just the 1st lender we've tried. Do all lenders have the same criteria? Our credit scores are 775-810, so that rules out any credit issues. The lender also told me that even though we have strong rental history showing on our income taxes, she can not count "ordinary income" to qualify for a mortgage.
@Reggie Rearden - traditional banks can be a major pain. The lenders I work with do strictly non-owner occupied loans and don't underwrite based on the financials of the buyer/owner. Financing is based mostly on the numbers of the property itself. I'm guessing though this is an owner occupied property which is what I'm guessing you mean by personal property?
@Reggie Rearden - traditional banks can be a major pain. The lenders I work with do strictly non-owner occupied loans and don't underwrite based on the financials of the buyer/owner. Financing is based mostly on the numbers of the property itself. I'm guessing though this is an owner occupied property which is what I'm guessing you mean by personal property?
Yes. It will be an owner occupied property. I purchased 8 acres a few weeks ago and now trying to get a mortgage to build our house on as a primary residence.
I'm not grasping the fact that the lender wont let us use the taxable income shown on our returns. We don't take distributions on any of our LLC's. The lender said we need to have at least (2) years of income showing we take distributions. I'm hoping this is not the case for all lenders. How do investors usually pay themselves when assets are in LLC's? We have 8 rental incomes and 3 small businesses.
@Reggie Rearden
Sounds like and “idiot” loan officer or maybe a covid19 fluke
For the LLC, you should be taking draws from your LLC accounts to your personal accounts. You don't normally pay yourself a salary since it's a pass through entity. If anything, your SchC shows your income
For the rentals, they should be taking your SchE filings and recalc for 75% of the rental income (not your profit/loss, but 75% of the rents).
So, your W2 plus your SchC plus your SchE (modifies for 75% of the rents) is your total income. Yes, your rentals may drive your income down because of depreciation and tax-wise people find things to deduct. Your SchC income may not be as high as it could be because of misc business deductions
Unless your SchC and SchE are showing negative, it sounds like your loan officer isn’t considering a single one of them. Find another loan officer
Oh, at least in NJ they aren’t originating loans off of gross income. It’s specifically for the self employed who have healthy deductions. They basically qualify you for a loan based on the income deposits into your bank statement (so still can’t work magic if you have some sort of pure cash business).
Hope that helps. Good luck
@David M., Fortunately for us, every asset we own shows positive cash flow. We do not take draws because my W2 income supports our lifestyle. Incomes from the small businesses and rentals are put back into the businesses and / or reserved for working capital. I hope to talk to another lender Monday. Also, my wife is an S-corp, which threw another monkey wrench into the loan. To clarify, here's a breakdown of what we have:
Income Tax and Bookkeeping business- Sole P in my wifes name (getting ready to convert it to an S-corp)
Hair and Nail Salon- Single member S-corp in my name
Wife is self employed as an S-corp (she booth rents from the salon I own)
Commercial real estate LLC - 5 unit commercial building (wife and I are partners)
Commercial real estate LLC - single unit commercial building (wife and I are partners)
Residential LLC - Holds all SFH's (wife and I are partners)
Master LLC that controls every investment property.
I know we have a lot of moving parts. We had one of our employees from our tax office meet with us and our attorney. This is how they suggested we lay everything out so we will be protected in the event of legal action (My W2 job requires almost constant credit monitoring and can not have any legal issues---lets just say a government job).
Also when looking at how everything is set up, take into consideration that everything listed above has been created since 2017 with the exception of the tax office and her being a cosmetologist. We are definitely newer investors and did all of this with no mentors and prior to us finding out about BP's!
Try a community bank. They are so much easier to work with, and actually try and come up with solutions.
Oh, I see. yep, that's a little more complicated. I hear you about the Gov't job. I see where you are at. been there done that for 18 years, but didn't go crazy with your structure! :) Boy, that's a lot of bank accounts, and maybe even credit cards!!
All your S Corps should be giving you a "reasonable" salary creating more W2. Again, those are pass through entities so any profits are being passed onto your 1040 and being taxed. So, taking draws is really a moot point from a tax point of view. Owner draws are really an accounting category (I think there is a more technical term for it).
I see your other companies are taxed as partnerships. They are a bit different; I don't do any of those. But, I do understand they are still effectively pass through entities so their profits, active or passive, are being spit out to you on a K-1 form every year.
If you are using a traditional bank (e.g. wells Fargo, Chase, etc.), they have been slapped with so many regulations after the 2008 crash apparently, they are now originating a mere fraction of the loans nowadays and are in the minority. Non-bank mortgage lenders have taken over. It just has to do with the regulations applying to banking institutions. In the past couple of years, I've found the non-bank mortgage lenders much more flexible. Also, if you find a "good" loan officer, they are working "Realtor" hours so you can get a hold of them outside of the 9-5 timeframe. That can be key for those borrowers who are tied up with their 9-5 (especially if you can't have your cell phone at your desk, if you know what I mean...). So, its not necessarily the vendor/company but the loan officer personality and work ethic that you are looking for. If you want, direct message me and I can see if maybe my loan officer can originate loans in SC or maybe refer you to a good one.
Another option is to find a true mortgage broker. there is a "slight" distinction as these people actually go and search for the best loan for you. As I understand it, they themselves aren't originating the loan and they are acting as a true broker.
On another note, I can't understand why your first loan officer can't make it work. You said you are trying to get a loan for your own personal residence. So, you aren't talking about a commercial loan for any of your investments. the S-Corps should spitting out more W-2 income. You have your own W-2 income. That's not enough to get you something in SC? Anyway, I'm not asking you to share your personal finances on a public forum, but you should definitely ask around.
Good luck, and stay safe.