voluntarily paying more tax(!) for a cashout refi, cannot get guidance

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voluntarily paying more tax(!) for a cashout refi, cannot get guidance

Account Closed
investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes

Have the following :

a primary res in NYC valued at 800k,

2 investment 3 fams in New Haven, CT each valued at 150k cashflowing 15k each per year, and an investment condo in Baltimore, MD valued at 100k cashflowing 10k per year.

Paid all cash for all of them. Have no debt obligations of any kind, credit score is 750.

2013 income from self employment was 25k thus total inc was 65k.

To get the 600k out of the primary res am trying to figure out how much income is needed to show for 2014.

HOA and tax(which is abated thankfully!) adds up to 500 /mon and if take 600k out thats approx 3k/mon mortgage . thus debt will be 3500/mon. if DTI of 45% is permitted then income needs to be 8k/mon approx =95k approx per year.

Need inc to be 95k average over 2 years so for 2014 need to forgo deductions to get inc to 125k. So with income from inv properties at 40k then self employed inc in 2014 needs to be 85k. By forgoing deductions and paying 35k or so in tax (ouch!) this can be made to happen.

Problem is mortgage brokers seem to be very reluctant to confirm these calculations, is there any way to know what income exactly is needed so the tax paid is no more than necessary?

2nd question :

After that ,should be able to get 75% cashout refi on the other properties because the inc on them easily covers the mortgage. Because they remain cashflow positive even with a mortgage, DTI is irrelevant and only applies to primary res financing. Is there anything wrong with this reasoning ?

Sorry for long post but dont know how else to communicate this situation.

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Robert Sepulveda
Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
11y

All good advice except, "don't claim any expenses". A good mortgage banker can give you back your deductions on your rental income properties as income - property taxes, depreciation, insurance, and interest can be deducted and should. You should get all that back to counteract your total deductions. Simply claim the most income you should, take your usual and customary deductions, and then deal with a competent mortgage banker who'll qualify your for the maximum you can. 

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    11y

    While neglecting to claim income or inflating expenses is tax fraud, doing the opposite may be considered mortgage fraud. 

    Mortgage brokers are reluctant to confirm because they can read the subtext of your questions.  Believe me, they've seen it all.  I have a couple of mortgage broker friends who tell me all about the crap their clients try to pull and we have a giggle over it on a semi regular basis.

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  • Erenik Meka
    Towson, MD · Member since 2015 · 11 posts · 0 votes
    11y

    my girlfriend is a mortgage banker who handles mostly cash-out/refis and she has some info for you..

    -if your primary is valued at $800k, you are capped at 70% LTV meaning the max loan amount you could borrow would be $560,000, regardless of your DTI, for a conventional loan (anything over $417k is JUMBO and therefore has that 70% cap as a guideline)

    -rates 3.250%-4.375% estimated for 750 MIDDLE credit score

    -true DTI is nearly impossible to calculate on your own. The banker needs to pull your credit, obtain property tax, HOI, rent and HOA information for all properties you own as well as obtain pay stubs, W2s and tax returns for full 2 years. Any self-employment income or rental income must be received for 2 full years in order to be considered AND must be reported on taxes. Capital gains cannot be used.

    -don't deduct anything. Any loss claimed in tax returns is averaged over 2 years. $35k is a lot to pay in taxes but it's always better from a banking standpoint to claim as much income as you can 

    -FHA allows for 85% LTV and max DTI of 52% (bottom ratio). Only drawback: FHA has county specific loan limits which could rule out that program all-together depending on where you live.

    -3%-4% rates for FHA if desired loan amount is avaialbe in your county

    -you're capped at 75% LTV on non-owner occupied residences regardless of DTI

    -liquid assets are VERY important when you have investment properties (401k, IRA, other vested retirement funds or checking/savings)

    -any reasonable and honest banker will never tell you that you are pre-qualified until they check your credit and get the information I mentioned above. They don't want to "confirm" your calculations or tell you some of what I mentioned because more often than not, they know there is a lot more that goes into those DTI calculations than what you'd expect

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  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    11y

    @Account Closed

    I would get pre-qualified first and then look into doing your taxes. I am always glad to answer questions.

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  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    11y

    @Erenik Meka writes "Capital gains cannot be used.". In my case, given my stock portfolio has shown consistent and significant LTCG, this is listed as income in calculating my DTI. On the conventional loans I obtained this year they even ignored my self-employment and consulting income because it was a little harder to justify, and given my LTCG on stocks qualified me.

    0Reply
  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @Linda Weygant:

    While neglecting to claim income or inflating expenses is tax fraud, doing the opposite may be considered mortgage fraud. 

    Mortgage brokers are reluctant to confirm because they can read the subtext of your questions.  Believe me, they've seen it all.  I have a couple of mortgage broker friends who tell me all about the crap their clients try to pull and we have a giggle over it on a semi regular basis.

    thanks for the info but why would we hide this from a lender , would they not be impressed that we have enough financial capacity to forgo deductions, surely that  indicates financial strength to them. and why is it not a good thing to ask them how their formula works so that no more taxes than needed are paid , does that not indicate good financial governance. 

    0Reply
  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @Erenik Meka:

    my girlfriend is a mortgage banker who handles mostly cash-out/refis and she has some info for you..

    -if your primary is valued at $800k, you are capped at 70% LTV meaning the max loan amount you could borrow would be $560,000, regardless of your DTI, for a conventional loan (anything over $417k is JUMBO and therefore has that 70% cap as a guideline)

    -rates 3.250%-4.375% estimated for 750 MIDDLE credit score

    -true DTI is nearly impossible to calculate on your own. The banker needs to pull your credit, obtain property tax, HOI, rent and HOA information for all properties you own as well as obtain pay stubs, W2s and tax returns for full 2 years. Any self-employment income or rental income must be received for 2 full years in order to be considered AND must be reported on taxes. Capital gains cannot be used.

    -don't deduct anything. Any loss claimed in tax returns is averaged over 2 years. $35k is a lot to pay in taxes but it's always better from a banking standpoint to claim as much income as you can 

    -FHA allows for 85% LTV and max DTI of 52% (bottom ratio). Only drawback: FHA has county specific loan limits which could rule out that program all-together depending on where you live.

    -3%-4% rates for FHA if desired loan amount is avaialbe in your county

    -you're capped at 75% LTV on non-owner occupied residences regardless of DTI

    -liquid assets are VERY important when you have investment properties (401k, IRA, other vested retirement funds or checking/savings)

    -any reasonable and honest banker will never tell you that you are pre-qualified until they check your credit and get the information I mentioned above. They don't want to "confirm" your calculations or tell you some of what I mentioned because more often than not, they know there is a lot more that goes into those DTI calculations than what you'd expect

     thanks to you (and your girlfriend) for the reply Erenik,

    i have got conflicting info from brokers about the LTV. i heard nyc is a high income area and thus the limit is $625 not $417 and thus 75% is allowed. I tried reading through the fannie and freddie manuals but am still unsure

    for DTI i have all of the data: the credit score, the primary res HOA and HOI and property tax, the income and all expenses from the investment properties are there on the sched E, and the self employed income (no w2 income). i was wondering what else do they need and how complicated can it be to calculate the DTI from that.

    regretably there are no liquid assets (just 1.2 million of debt free property!)

    FHA sounds like a great idea i will check it out.

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  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @John D.:

    @Erenik Meka writes "Capital gains cannot be used.". In my case, given my stock portfolio has shown consistent and significant LTCG, this is listed as income in calculating my DTI. On the conventional loans I obtained this year they even ignored my self-employment and consulting income because it was a little harder to justify, and given my LTCG on stocks qualified me.

     consistent and significant LTCG is impressive! hats off to you John!. we did actually have 30k of CG in 2013 but its a one time thing  so i assumed it cannot be used 

    0Reply
  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @Jerry Padilla:

    @Account Closed

    I would get pre-qualified first and then look into doing your taxes. I am always glad to answer questions.

     thanks Jerry, good to know , as i am very likely to have a lot more questions!

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    11y
    Originally posted by @Account Closed:
    Originally posted by @Linda Weygant:

    While neglecting to claim income or inflating expenses is tax fraud, doing the opposite may be considered mortgage fraud. 

    Mortgage brokers are reluctant to confirm because they can read the subtext of your questions.  Believe me, they've seen it all.  I have a couple of mortgage broker friends who tell me all about the crap their clients try to pull and we have a giggle over it on a semi regular basis.

    thanks for the info but why would we hide this from a lender , would they not be impressed that we have enough financial capacity to forgo deductions, surely that  indicates financial strength to them. 

     Not really, no.  If you're deliberately inflating your net income in order to qualify for a mortgage rather than reporting all of the expenses required to run your business, in my opinion it's fraud, plain and simple and as a CPA, I would not help you do this.  However, you seem determined to head down this course of action and there seem to be plenty of people here to advise you on how to do it, so I'll respectfully just bow out of the conversation and you can do what you like. 

     Your question was not whether or not this was the right course of action, it was simply how to do it.  So I'll let others answer your question rather than attempt to give you any further moral or ethical advice.  

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    1Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    11y

    @Account Closed

    Linda offers good advice here in respect to the comments made about mortgage fraud. Unless I'm not understanding, you are deliberately misrepresenting your financial position to qualify for a loan. Imagine if you were running a company with investors and you didn't report your expenses to boost your bottom line - sure it's not the same scale, but it's the same principle. Enron anyone?

    0Reply
  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @Linda Weygant:
    Originally posted by @Account Closed:
    Originally posted by @Linda Weygant:

    While neglecting to claim income or inflating expenses is tax fraud, doing the opposite may be considered mortgage fraud. 

    Mortgage brokers are reluctant to confirm because they can read the subtext of your questions.  Believe me, they've seen it all.  I have a couple of mortgage broker friends who tell me all about the crap their clients try to pull and we have a giggle over it on a semi regular basis.

    thanks for the info but why would we hide this from a lender , would they not be impressed that we have enough financial capacity to forgo deductions, surely that  indicates financial strength to them. 

     Not really, no.  If you're deliberately inflating your net income in order to qualify for a mortgage rather than reporting all of the expenses required to run your business, in my opinion it's fraud, plain and simple and as a CPA, I would not help you do this.  However, you seem determined to head down this course of action and there seem to be plenty of people here to advise you on how to do it, so I'll respectfully just bow out of the conversation and you can do what you like. 

     Your question was not whether or not this was the right course of action, it was simply how to do it.  So I'll let others answer your question rather than attempt to give you any further moral or ethical advice.  

    thanks for helping me see that  Linda. i have zero interest in committing   fraud, i have actually mentioned this to lenders not just brokers no one pointed out it was fraud they all just say we cant tell you anything until you give us tax returns. i had every intention of telling them because i thought they would approve. (not to mention is it not ethically generous to give to society more than your share!)

    0Reply
  • Account Closed
    OP
    investor · Brooklyn, NY · Member since 2015 · 9 posts · 2 votes
    11y
    Originally posted by @Brandon Hall:

    @Account Closed @Linda Weygant

    Linda offers good advice here in respect to the comments made about mortgage fraud. Unless I'm not understanding, you are deliberately misrepresenting your financial position to qualify for a loan. Imagine if you were running a company with investors and you didn't report your expenses to boost your bottom line - sure it's not the same scale, but it's the same principle. Enron anyone?

     thanks fro the advice Brandon, the loan officers i spoke to never said this.  

    0Reply
  • Robert Sepulveda
    Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
    11y

    All good advice except, "don't claim any expenses". A good mortgage banker can give you back your deductions on your rental income properties as income - property taxes, depreciation, insurance, and interest can be deducted and should. You should get all that back to counteract your total deductions. Simply claim the most income you should, take your usual and customary deductions, and then deal with a competent mortgage banker who'll qualify your for the maximum you can. 

    2Reply
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