Looking for cash out refinancing - 50%+ equity after loan.
Rantoul, IL · Member since 2014 · 16 posts · 2 votes
Looking for cash out refinancing - 50%+ equity after loan.
12 Replies
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes12y
@Dirk Richmond - The max DTI now because of Dodd Frank is 43% - so from what I know with traditional lending there is not any wiggle room. Can you lower DTI other ways? paying off a car / credit cards?
Second City Real Estate4.821 Reviews - Rantoul, IL · Member since 2014 · 16 posts · 2 votes12y
Thanks for your reply. There is no other debt other than home mortgage. I just don't get it.
- Real Estate Broker · Greenville, SC · Member since 2013 · 269 posts · 141 votes12yBrie Schmidt Dodd-Frank gave us a 7-year waiver on that new DTI restriction for a QM. We can still go above 45% if Desktop Underwriter approves.
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes12y
@Michael Smith - Thanks! I did not know that
@Dirk Richmond - Are you showing a loss on your schedule E - That counts as negative income and effects your DTI - Are you familiar with front end and back end DTI
Second City Real Estate4.821 Reviews - Rantoul, IL · Member since 2014 · 16 posts · 2 votes12y
Yes, the Sched E shows a loss of about $300 because of depreciation.
I can't say I'm specifically familiar with that term, but I'm guessing it's akin to a Cash vs. Accrual Income Statement?
- 12yJoseph ZanazanBusiness MemberLender · Los Angeles, CA · Member since 2014 · 64 posts · 50 votes
Originally posted by @Dirk Richmond:
Yes, the Sched E shows a loss of about $300 because of depreciation.
I can't say I'm specifically familiar with that term, but I'm guessing it's akin to a Cash vs. Accrual Income Statement?
When it comes to rental income (income you claim on your Schedule E), calculations are a little more intricate and quite different than income earned through regular wages or self employment. Underwriters are there to be super conservative and protect the best interest of the bank by nitpicking and dismantling your attempt at applying for credit. The bank will always take the conservative approach and take your gross adjusted income. Remember, one of the perks of owning property in this great country of ours are the allowances we get, aka our tax write-offs. This means you don't quite get to present that cash-flow as a dollar for dollar profit and get credit for it. After you write-off deprecation, insurance, interest etc on your rental property, the figure you're left with is what the underwriter will utilize as your true income. With a loss on your Schedule E, you're telling the underwriter that this property as a whole investment is well, a loss. That loss is the most accurate and adjusted income figure, and will always take precedent in the income calculations.
Depreciation is the natural aging your home is allowed to endure, basically the standard calculation of wear and tear that enables you to deduct from your tax liability. There are multiple methods to calculate depreciation e.g. Straight line, Double depreciation, Sum of years etc. The STRAIGHT LINE depreciation is the primary method that is utilized nowadays. To calculate, you take the initial cost of the asset and divid it by its estimated "useful life." So if you buy a house for $100,000, and since home loans are amortized over 30 years, you divide $100,000 by 30. You would be depreciating at an annual rate of $3000. Annual depreciation of $3000 translates to an adjustment of $250 to your rental income calculation. After you treat the numbers with their appropriate formulas, you carry that income over to your main Front and Back end ratios, aka DTI ratio. Front end encompasses your total living housing expense, which is the total expenses of the residence in which you are residing in. Back end encompasses everything. Everything means your total liabilities, including taxes and insurance payments on all properties and everything on your credit report. Might be a lot to take in all at once. The more you ask, the more you learn.
PS. Land does not depreciate.
- Rantoul, IL · Member since 2014 · 16 posts · 2 votes12y
Joseph, thanks for the well thought out, detailed response. I do appreciate it. My being new here, you of course wouldn't know that I have a degree in Accounting and understand all that, hence my relating it to a cash vs accrual income statement. Also a Cash Flow Statement, but the subject was the reported loss.
All the cash expenses are accounted for in determining the profit on Sched E through interest and Association Fees, which include maintenance and insurance. The tenant has renters insurance. The depreciation has no affect on free net cash.
The lender said the underwriter only allowed 75% of the income to count toward income due to fairly recent regulation requiring that, but also said it was to account for exactly what you mentioned - maintenance, insurance, etc. - but that is inaccurate since they are already accounted for.
They don't appear to be distinguishing between "front end" and "back end" income. While I suppose I can understand it, they also don't include rent from another property that is paid for because it has not been rented for two years and is rented to family. If refinanced, the loan would go up $130 but the rent would go up a minimum of $200. Positive cash flow, good credit, no debt other than personal residence (Financed at 2%), and total financed less than 50% of appraisal.
I think, as usually is the case, the pendulum has swung too far back.
- Real Estate Broker · Greenville, SC · Member since 2013 · 269 posts · 141 votes12y
There are 2 ways that we can calculate NRI (Net Rental Income), and which method we have to use depends on when the property was purchased, or "placed in service."
If the property was placed in service within this calendar year, it will not appear on any Schedule E yet, so we have to use this formula:
Monthly NRI = (Gross Monthly Rent* x 75%) - Monthly PITI
Gross monthly rent must be evidenced by an executed lease agreement, and the 25% we take off the top is considered a vacancy allowance.
If the property was placed in service a previous calender year, we use the figures from Schedule E and plug them into this formula:
If owned free and clear... Annual NRI = Net Income or Loss + Depreciation
If financed... Annual NRI = Net Income or Loss + Depreciation + Taxes + Insurance + Mortgage Interest - Annual PITI
The reasoning behind this is to take the principal portion of your payments into account, since this is not reflected on the Schedule E but affects monthly cash flow.
Hope this helps!
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Michael Smith:
Brie Schmidt Dodd-Frank gave us a 7-year waiver on that new DTI restriction for a QM. We can still go above 45% if Desktop Underwriter approves.
This is true however its at the sole discretion of the lender to allow it or not, at my bank I can go to 50.99% on a freddie mac LP (rounds down to 50%) with great credit and plenty of reserves or 50.00% with Fannie Mae.
I've seen DTI's in the 56.99% range with FHA and up to 70-80% range on VA loans with near flawless credit/income/asset scenarios.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Dirk Richmond:
Joseph, thanks for the well thought out, detailed response. I do appreciate it. My being new here, you of course wouldn't know that I have a degree in Accounting and understand all that, hence my relating it to a cash vs accrual income statement. Also a Cash Flow Statement, but the subject was the reported loss.
All the cash expenses are accounted for in determining the profit on Sched E through interest and Association Fees, which include maintenance and insurance. The tenant has renters insurance. The depreciation has no affect on free net cash.
The lender said the underwriter only allowed 75% of the income to count toward income due to fairly recent regulation requiring that, but also said it was to account for exactly what you mentioned - maintenance, insurance, etc. - but that is inaccurate since they are already accounted for.
They don't appear to be distinguishing between "front end" and "back end" income. While I suppose I can understand it, they also don't include rent from another property that is paid for because it has not been rented for two years and is rented to family. If refinanced, the loan would go up $130 but the rent would go up a minimum of $200. Positive cash flow, good credit, no debt other than personal residence (Financed at 2%), and total financed less than 50% of appraisal.
I think, as usually is the case, the pendulum has swung too far back.
HI Dirk,
I could use 75% of rental gross income - PITIA however that calculation is the default and I do not need 2 years landlord experience via tax returns to document your experience either.
Day 1 with a lease agreement and copy of the security deposit showing you deposited the security deposit check is sufficient for me to use 75% of your gross rental income - PITIA (principal/interest/taxes/insurance/assessments).
Or
You can use the Schedule E with all non cash losses added back - deprec/amort/depletion/etc
The secret is in how you structure the file, document your story, and attach a well written LOE - letter of explanation so that the underwriter is guided to accept a certain "method," of calculation over the other. Obviously we'd guide them to the method that yields the most favorable results.
The problem I see with this area of lending is that most loan officers(LO's) do primary and secondary residences as their main focus and usually do not understand cash or accural methods of accounting, their relevance, or how to calculate cash flow accurately to counter an underwriting decline.
When underwriters don't understand complex corporate or partnership returns and how the income flows down to the 1040 and what the heck is going on they just default to worst case scenario income calculation.
I usually have to go back and forth with the underwriters and use snag-it to draw diagrams, text explanations, and such to explain these areas as the UW's sometimes are not used to it either.
Hope this helps, Let me know if you have any questions.
- Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes11yMake sure that the underwriter is grossing up their fixed income if it's nontaxable. If they have an IRA see if they're willing to take a regular monthly distribution and that can also be used towards their qualifying income. What's the debt ratio?
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