Rental property in schedule E counting against me w/ conventional loan, any options?
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Quote from @Sam Doyle:
Hi all,
Have a weird situation where I recently purchased a rental property 1 year ago and am looking for a new loan on a new property. I have great credit and W2 income to purchase a property before even adding my rental income (~2k a month net). The rub is I invested ~100k in the first year in deferred maitenance + upgrades/remodels and the underwriters say that they cant use current cashflow & new leases and have to use the old 2022 Schedule E numbers which are low from vacancy, old leases & insane 1x deferred maintenance bill from purchase.
Do you know if I am simply SOL if I want to qualify for another conventional loan until I get my 2023 Schedule E next year? I'm actually cashflowing >2k a month on the property now but they are basically telling me its -4.5k / month given the now very outdated 2022 schedule E. Is this just a bad underwriter or is that underwriting policy everywhere?
@Sam Doyle It sounds like you are applying for a conventional loan correct? Assuming so, then yes, the underwriter has to use the last filed tax returns to generate income or loss on rental properties. (the underwriter does not make the rules but rather follows the requirements sent out by Fannie/Freddie for conventional loans) They will use this worksheet: Rental income worksheet If you look at line A7 it allows for the add back of "one time expenses", So, if you can argue that some of your write offs from your tax return are one time expenses you would be able to add those expenses to your net rental income. It still might be a loss but maybe enough your debt to income can absorb.
But, if not, you can always go with a debt service coverage ratio loan on the new property that does NOT look at your tax returns at all. This is assuming the new property is going to be non-owner occupied as well as they are only available on investment properties. They will have worse overall terms then a conventional loan but designed for folks in your position.
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5 Replies
- Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes3y
I fought that battle last summer when I was buying but luckily I had several mortgages with them and my Mortgage Agent was able to talk sense to these underwriters. I had purchased a home at the end of October, updated it and had it only rented out for December, of course it was negative. On paper this was a horrible investment but you have to paint the picture to them that you just didn't have enough time on the books to make enough rent to offset the expenses as a 1 time thing. For 2022 of course I show a healthy profit especially once you add back depreciation. You may or may not win this one but in my experience I just said the same thing over and over until it sank in. The relationship probably helped though with the sheer number of on time payments and nothing ever being late.
Quote from @Adam Martin:
I fought that battle last summer when I was buying but luckily I had several mortgages with them and my Mortgage Agent was able to talk sense to these underwriters. I had purchased a home at the end of October, updated it and had it only rented out for December, of course it was negative. On paper this was a horrible investment but you have to paint the picture to them that you just didn't have enough time on the books to make enough rent to offset the expenses as a 1 time thing. For 2022 of course I show a healthy profit especially once you add back depreciation. You may or may not win this one but in my experience I just said the same thing over and over until it sank in. The relationship probably helped though with the sheer number of on time payments and nothing ever being late.
Thanks, it does feel like an uphill battle but glad to hear you were able to make it work. It seems crazy they can't use up to date leases for their PF, current rent role should matter so much more to them if they want to be accurate...
Quote from @Sam Doyle:
Hi all,
Have a weird situation where I recently purchased a rental property 1 year ago and am looking for a new loan on a new property. I have great credit and W2 income to purchase a property before even adding my rental income (~2k a month net). The rub is I invested ~100k in the first year in deferred maitenance + upgrades/remodels and the underwriters say that they cant use current cashflow & new leases and have to use the old 2022 Schedule E numbers which are low from vacancy, old leases & insane 1x deferred maintenance bill from purchase.
Do you know if I am simply SOL if I want to qualify for another conventional loan until I get my 2023 Schedule E next year? I'm actually cashflowing >2k a month on the property now but they are basically telling me its -4.5k / month given the now very outdated 2022 schedule E. Is this just a bad underwriter or is that underwriting policy everywhere?
@Sam Doyle It sounds like you are applying for a conventional loan correct? Assuming so, then yes, the underwriter has to use the last filed tax returns to generate income or loss on rental properties. (the underwriter does not make the rules but rather follows the requirements sent out by Fannie/Freddie for conventional loans) They will use this worksheet: Rental income worksheet If you look at line A7 it allows for the add back of "one time expenses", So, if you can argue that some of your write offs from your tax return are one time expenses you would be able to add those expenses to your net rental income. It still might be a loss but maybe enough your debt to income can absorb.
But, if not, you can always go with a debt service coverage ratio loan on the new property that does NOT look at your tax returns at all. This is assuming the new property is going to be non-owner occupied as well as they are only available on investment properties. They will have worse overall terms then a conventional loan but designed for folks in your position.
Hurst Real Estate, INC4.986 ReviewsQuote from @Jay Hurst:
Quote from @Sam Doyle:
Hi all,
Have a weird situation where I recently purchased a rental property 1 year ago and am looking for a new loan on a new property. I have great credit and W2 income to purchase a property before even adding my rental income (~2k a month net). The rub is I invested ~100k in the first year in deferred maitenance + upgrades/remodels and the underwriters say that they cant use current cashflow & new leases and have to use the old 2022 Schedule E numbers which are low from vacancy, old leases & insane 1x deferred maintenance bill from purchase.
Do you know if I am simply SOL if I want to qualify for another conventional loan until I get my 2023 Schedule E next year? I'm actually cashflowing >2k a month on the property now but they are basically telling me its -4.5k / month given the now very outdated 2022 schedule E. Is this just a bad underwriter or is that underwriting policy everywhere?
@Sam Doyle It sounds like you are applying for a conventional loan correct? Assuming so, then yes, the underwriter has to use the last filed tax returns to generate income or loss on rental properties. (the underwriter does not make the rules but rather follows the requirements sent out by Fannie/Freddie for conventional loans) They will use this worksheet: Rental income worksheet If you look at line A7 it allows for the add back of "one time expenses", So, if you can argue that some of your write offs from your tax return are one time expenses you would be able to add those expenses to your net rental income. It still might be a loss but maybe enough your debt to income can absorb.
But, if not, you can always go with a debt service coverage ratio loan on the new property that does NOT look at your tax returns at all. This is assuming the new property is going to be non-owner occupied as well as they are only available on investment properties. They will have worse overall terms then a conventional loan but designed for folks in your position.
Wow thanks for the thoughtful response, that is super helpful. Yes, I'm applying for a conventional loan on a new owner occupied property.
Good to know re: one time expenses, I think can make strong argument for majority of cost from last year would be "one time expenses". @Jay Hurst do you happen to know if they can take into account new leases for a PF income? Raised rents significantly for 2023 as we turned over the old tenant base. That could be a solid 1-2 punch argument to squeeze into qualifying (despite it being very comfortable expense for me in reality)
Quote from @Sam Doyle:
Quote from @Jay Hurst:
Quote from @Sam Doyle:
Hi all,
Have a weird situation where I recently purchased a rental property 1 year ago and am looking for a new loan on a new property. I have great credit and W2 income to purchase a property before even adding my rental income (~2k a month net). The rub is I invested ~100k in the first year in deferred maitenance + upgrades/remodels and the underwriters say that they cant use current cashflow & new leases and have to use the old 2022 Schedule E numbers which are low from vacancy, old leases & insane 1x deferred maintenance bill from purchase.
Do you know if I am simply SOL if I want to qualify for another conventional loan until I get my 2023 Schedule E next year? I'm actually cashflowing >2k a month on the property now but they are basically telling me its -4.5k / month given the now very outdated 2022 schedule E. Is this just a bad underwriter or is that underwriting policy everywhere?
@Sam Doyle It sounds like you are applying for a conventional loan correct? Assuming so, then yes, the underwriter has to use the last filed tax returns to generate income or loss on rental properties. (the underwriter does not make the rules but rather follows the requirements sent out by Fannie/Freddie for conventional loans) They will use this worksheet: Rental income worksheet If you look at line A7 it allows for the add back of "one time expenses", So, if you can argue that some of your write offs from your tax return are one time expenses you would be able to add those expenses to your net rental income. It still might be a loss but maybe enough your debt to income can absorb.
But, if not, you can always go with a debt service coverage ratio loan on the new property that does NOT look at your tax returns at all. This is assuming the new property is going to be non-owner occupied as well as they are only available on investment properties. They will have worse overall terms then a conventional loan but designed for folks in your position.
Wow thanks for the thoughtful response, that is super helpful. Yes, I'm applying for a conventional loan on a new owner occupied property.
Good to know re: one time expenses, I think can make strong argument for majority of cost from last year would be "one time expenses". @Jay Hurst do you happen to know if they can take into account new leases for a PF income? Raised rents significantly for 2023 as we turned over the old tenant base. That could be a solid 1-2 punch argument to squeeze into qualifying (despite it being very comfortable expense for me in reality)
I mean technically you can, but Fannie is very grey in their guidelines for an exception to use tax returns. See a snip directly from Fannie:
https://selling-guide.fanniema...
but conventional underwriters/lenders do not like grey because there is a risk that Fannie will force the lender to buy back the loan if they do not agree that the "situation warranted an exception". So, you can try.
Hurst Real Estate, INC4.986 Reviews
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