Looking for a HELOC! Need common-sense underwriting!

7 Replies

My primary residence is worth between $775K and $800K. I'm a realtor so that value should be very close to accurate. I have a first loan at $384K and I'm looking to get a HELOC (home equity line of credit) for between $150K and $200K which would still keep me below a LTV of 80% pretty easily. Seems easy, right?

Hurdle 1) I purchased 4 rental homes between August of 2015 and November of 2015. The homes all cash flow positively. Here's the hurdle by using 1 of the rental homes as an example: Home purchased August of 2015 has rental income of $3,300 per month. PITI is $2409. That works as cash flow positive. I got rejected on a HELOC by a credit union because they will see the $2409 in expenses on my credit report, but they won't look at a lease agreement, but will only take income from my tax returns which 2015 tax returns aren't out yet and 2014 tax returns won't show a home purchased in 2015. If you multiply these scenario by 4 homes and I can't use any rental income, you can see why my debt to income ratios would be out of whack unless the HELOC will consider the rental income off these homes. To me, if you can count the debt that started 8/21/15, why can't you count the income that started 8/21/15?

Hurdle 2) I had a short sale on a home in August of 2011. Fannie Mae and Freddie Mac require that it's been past 4 years, you can get a home loan. I am past 4 years, but some lenders follow Fannie/Freddie and some of the places that I've talked to have their own overlays which are more strict than Fannie/Freddie.

Any credit unions or other places that might be okay with these 2 hurdles?

Hi Jason,

Hurdle 1, solution 1) Local credit unions often have better HELOC rates, but as you are learning are generally unwilling to take the time to do a thorough analysis for HELOCs. There is one bank out of the midwest that many brokers use for purchase business HELOCs. I broker my HELOCs to TCF bank specifically because they will accept Fannie and Freddie's standard methods of calculating DTI (which your local credit union obviously is not) instead of re-inventing the wheel, with the only deviation being that they will calculate their own debt obligation more conservatively (which makes sense given that it's an interest only product in 2nd lien position).

Hurdle 1, solution 2) File your taxes in person at the IRS office, and those tax returns can be used immediately without having to wait for the IRS to process. There are a few nuances to doing this - it's either a 10 minute conversation or 10 paragraphs of writing to go over it.

Hurdle 1, solution 3) If none of the above work, you could always do a cash out refinance on the primary using Freddie Mac (see hurdle 2 solution).

Hurdle 2 solution: Your information is like 3 months out of date, my friend! Freddie Mac has eliminated the short sale waiting period and the manual underwriting requirement, provided your credit is otherwise clean and we get an "LP Accept" from the automated underwriting engine. This is Freddie's way of rewarding borrowers that worked with the lender on a short sale rather than just walking and letting it foreclose. Note that not all lenders have embraced this change. 

EDIT: A nuance to TCF Bank is they they accept Freddie/Fannie methods of calculation provided that we do the work for them and present it as a complete already-done package. I have no idea if they would be willing to do that analysis themselves if someone went to them directly. They might. If you find out they do, please let me know so I'll  be better informed on that subject.

Hey Chris,

Thanks for the info! I called TCF today and they said they don't work with consumers directly in CA, but that you have to work with a mortgage broker. They asked if I knew a mortgage broker and of course I do. 

I'm open to working with you, but can you check and see that they don't require 5 years of seasoning on all short sales? I only have 4.5 years of seasoning on my short sale (Aug. 2011).

Jason

Interesting. Once every few months I send business their way because their product helps me put some nifty jumbo 80/10/10 deals together, and I think I'm doing them a favor. Would have been nice to know they've been turning people away. Odd thing is that their staff works CA time zone business hours.

Anywho: TCF does in fact require 5 years seasoning for short sales, good call on asking me to check that.

So hurdle one, solution #2 then. You're a realtor. Do you know the ninja trick for how to file your 2015 taxes early and have it instantly validated so you don't get stuck in 4506-T Hell while the IRS spends months "processing" your taxes? Ask the HELOC lender you've found if 2015 taxes will be considered "validated" based on:

1) IRS 4506-T request coming back with "not yet processed."

2) Color copy of your stamped 2015 tax returns that you filed in person at the IRS.

3) Copy of cashier's check for your tax bill that lines up with page 2 of your 2015 tax returns ("Amount You Owe") that is also stamped by the IRS.

4) Bank statement showing the funds clearing your account that also lines up with the above two documents. 

For anything I'm doing FHA/Fannie/Freddie and most Jumbo, the above 3 things lining up will suffice in lieu of 4506-T validation (I play this game a lot, Q1 every year). I have no idea if the HELOC lender you found will allow this, so ask.

Thanks Chris!

My 2015 tax returns won't be able to be filed early this year. I have several docs from corporations that don't get to me until March of every year that need to be included on the personal tax return.

I found that the National Association of Realtors has a credit union. Or they are affiliated with Northwest Federal Credit Union. Currently, they say they can use leases for homes purchased in 2015 to help with DTI. I just submitted the app there so hopefully it goes okay.

HI Jason,

Most credit unions like penfed, navy fed, BECU.org, DCU.org, and a whole host of others will require you to have 2 year landlord experience, but not all. This is an old rule that was required by many mortgage lenders in the past and in some cases its still required on most Jumbo loans, home equity lines of credit, and various other portfolio products. Its just knowing which ones to use to get what you want and what the pro's and con's are between each product given the goals you're trying to accomplish.

A lot of bankers and independents in socal broker to TCF like Chris mentions above.

I've had good experience getting rental income to be used in similar context to the above mentioned.

The formula is simple for rentals that dont yet show up on your tax return its 75% of gross income minus PITIA (principal/interest/taxes/insurance/assessments) to arrive at your net income figure that will either be added to your income column if its positive or a liability to be qualified for if its negative.

In cases where you just want to do a cash out refinance loan you could use 1 year tax program with Freddie Mac to avoid having to average both your 2015 and 2014 which causes more paperwork and more things for an underwriter to sift through and demand verifications and documentation on.

The nice part about using a 1 year tax program for self employment or realtor income (in your case) is that since there is only 1 year tax for your self employment we only need to use 1 year tax income on your rentals  as well which is a little known secret in the residential conventional lending world.

This is great when you have a great 2015 or past return but your 2014 or 2 year ago return was not as good. Sometimes you claimed a lot of repairs on your 2014 return but not your 2015 return so showing a 2015 return will allow your loan approval to be shown in the best light to an underwriter.

Since its now 10.25.16 and we're 10 days past the corporate return filing period of extensions I would assume you have your 2015 returns.

If the income is good you can use that income, if not there are ways to document the use of the other income method of 75% of gross - PITIA if you did substantial repairs to your properties upon purchase or if the tax returns were not an accurate depiction of actual income, whichever method is best from a qualification stand point.

Thanks Albert! I got a HELOC with Realtor Federal Credit Union in February of 2016. They counted the leases I had even though they weren't on my 2014 tax returns (being 4 were purchased in 2015).