All Forum Posts by: Chris Mason

It's not.

The processor or underwriter who told you they would need to see the K-1 stopped there so that you, the customer, could feel that you are right. I'll continue where they left off: 

As soon as the underwriter saw the K-1 showing >25% ownership, they'd ask for those business tax returns, which would have the exact same information on them that your Sch E has now, and you'd be back to square 1. 

The problem here, bottom line, is that the property is not cashflow positive according to what you reported to the IRS. Which tax form you use would not change that. The Schedule E equivalents for S-Corps (including LLCs that elect to be taxed as an S-Corp), C-Corps, trusts, and the rest, all have the same information. 

When a rental property is cashflow positive according to Sch E (or the equivalent), the mortgage is omitted. Or, more precisely, it's subtracted from the gross income along with other expenses (plus the depreciation add-back, etc), and any remaining positive number is included as income (with nothing listed as a debt/liability). Any negative number is included as a debt. 

In your alternative scenario wherein the underwriter reviews business tax returns rather than Schedule E, the same rent and expenses still appear, so that didn't actually solve anything. I love mortgage ops people and we need them, but they're conditioned to only see what is directly in front of them, rather than thinking a step or two ahead. 

Solving Problem A by shifting it to Problem B isn't a real solution. But saying "gee willickers mr consumer you sure are right the rules are dumb but what can you do, this darned technicality" (snaps fingers) is, in some eyes, "good customer service" (especially since the person saying that knows you can't fix it in a week or a day, if you could then they'd have a reason to actually be accurate, as it stands there's zero incentive to be accurate, they're just trying to push you along so they can work on the next loan number, since yours is about to be denied [they are paid in part by the hour, but also in part on production of approved/closed loans]).

Here's what's actually jamming you up. The property is cashflow negative. Or, at least, your tax returns say it is. That wouldn't likely change if a different tax form was used. 

Here's Schedule E: https://www.irs.gov/pub/irs-pd...

I've seen many clients use 1120-S for their LLC tax returns. 1120-S has it's own form of "Schedule E," which is form 8825: https://www.irs.gov/pub/irs-ac...

And if you have a K-1 wherein you are >25% owner, they are 100% going to ask for the business tax returns. The person who told you they were an underwriter, likely a processor or underwriting assistant, didn't think about that next step.

The "meat and potatoes" of the two forms are the same. If the property is cashflow negative according to one, it'll remain cashflow negative when the exact same numbers are transposed onto the exact same spots on a new form, that contains the exact same math. 

Short of actually turning a profit on your rental, and disclosing that fact honestly to the IRS, as others indicated, the short-term band-aid fix is a DSCR loan. Watch out for the prepayment penalties, you don't want to be in a position wherein you can't refinance out of the high rate DSCR loan once you've got your taxes in order a year from now.

Good luck, mi amigo, and I'm sorry that processor or assistant confused you.

So that person can't get a mortgage. Otherwise, they wouldn't be coming out the gate offering you staggeringly worse terms (for them) than they could get if they called me, or someone like me and could qualify. 

Honestly, if I'm in your shoes and only since THEY brought this up, AND have 20% down, I'd offer a rent-to-own. Instead of a 3 year balloon, they've got a 3 year clock, and I'll agree to tell the home at today's price within those three years, and count a portion of the (slightly above market) rent towards the price. They also take over all routine maintenance, starting now. There's already a bunch of existing content on the advantages of rent-to-own (pay particular attention to the option fee, refundable if/when they actually execute on the purchase), and I'm generally not a huge fan of it, but it seems to make sense in this particular case specifically because it's your home in particular they want, and they have 20% down.

I did not pick 3 years out of the blue. For someone that has 20% down but can't get a normal mortgage, by far the most common culprit is that they are self-employed, but "creative" when they do their taxes, meaning they show little income to cut down on the tax burden, but those tax returns are what lenders rely upon to determine if this person can make the mortgage payments. In all conceivable scenarios, three years is sufficient for them to find Jesus, get a little more honest on their taxes, and then be able to qualify for a mortgage. 

It's also possible they are asking for seller financing because they have horrible credit, in which case you wouldn't want to extend credit to that person anyways, so you're welcome for steering you away from that mine field. :)

If real estate goes up 20% or 50% in the next three years, you're no worse off on the "aw shucks" front compared to if you just sold today, so no big deal there, since nothing additional is lost that wouldn't been lost anyways, by selling in 2022. And if real estate goes down (who knows), you will feel quite good about that 2022 sales price in 2025... they might not want to buy at that point, but hey you get to keep the option fee and above market rents you collected, and you get to keep the savings from not having to take care of routine maintenance during those 3 years. 

Take the two that have positive reviews, pick one other whose jib you like the cut of, and go see what Google Business Reviews has to say. Unlike all other online review platforms, google business reviews has no "pay to play" mechanism where you can delete/hide bad reviews, only see good ones, or anything like that. 

 It's Q4 and you want to buy in Q4 or Q1. So get preapproved now. 

When the new loan limits come out, just call your loan officer and ask how it impacts you and if it increases your buying power. 5 minute phone call (assuming it's not some over-systematized internet lender or call center, but a place with humans). No reason to wait.

This isn't tax-payer subsidized Fannie Mae type loan, this is a DSCR / alt-doc / subprime / non-qm / whatever-you-want-to-call-it loan (DSCR is the "most correct," but the other terms get used interchangeably even though they are not as precise). Comparing to Fannie is apples to oranges -- if you could get a Fannie Mae loan, presumably you'd have applied for one!

Apples to apples with what it is, these terms / fees / etc are in-line with market. 

 Typically you only pay the appraisal fee if you do not close. Lenders are allowed to also charge for the credit report, but that's somewhat uncommon.

Other than that, you do not pay until/unless you actually close.

The title/escrow stuff, which is listed both as a "loan cost" AND as "services you can shop for," you get a vote on. Your loan officer already has an incentive to find cost effective and efficient people (since that'll let them do more business, after all), but if you think you can find cheaper, you are allowed to. Word of caution: don't go so cheap that you're talking to someone in the developing world, that's a great way to screw up something that otherwise would/should have been simple. 

Markets find equilibrium. Supply and demand. If something is overly-hyped, that represents a demand increase. So, holding constant supply, that means the price will go up.

Remember that idiot uncle/cousin/fiancé/whatever growing up, at the holiday dinner, who always said that "if you want to get a good deal on a house, buy a foreclosure"? Or, "the key to getting a good deal is to lowball, to leave room for negotiation"? Or other such gibberish, like "the way you get a good deal on a car is to go to the dealership right before the end of the month, to catch them when they need to hit a quota"? (Hint hint: car dealerships stopped measuring for quotas/bonuses/etc at the day that is the end of the calendar month like 20 years ago, or otherwise found another way to measure...)

The fact that even THEY knew about that "hack," is what told you that word was out, it was no longer niche or insider information, and thus it was no longer necessarily a guaranteed recipe for success. Supply and demand. Now that every rando out there was looking to "get a good deal by buying a foreclosure," suddenly the prices on those property types went up, and it was no longer a magical recipe for success. Realtors still have to constantly deal with FTHB that think they've found a way to "beat the system" thanks to their uncle's "words of wisdom" 15 years ago.

That doesn't mean you "couldn't" or "can't" pull that off, just that it's no more or less likely than any other ho-hum vanilla standard strategy. Because it IS a ho-hum vanilla standard strategy. 

So, with that context. Here I am taking my boring-as-silt annual continuing education to maintain my mortgage license (and found an excuse to be diverted from this boring stuff to post this thread :P ). Guess what my idiot uncle put on the final exam? 

Yyyyyyyyup. Here you are:

My thread title was a bit dramatic. The mortgage continuing education exam in front of me is not as ubiquitous as everyone's stupid uncle. But it'll be there soon enough. It's been iffy for some time, it's not dead, but it's in a coma, the family is asking for the plug to be pulled.

"House hacking" isn't dead, but the goalposts have been moved. Once upon a time it meant buy a 2-4 unit with 3.5% down FHA, and the other units would fully cover the PITI - that "orthodox" or "fundamentalist" or "original meaning" approach is mostly dead (markets find equilibrium, supply and demand). Then it became "partially offset" the PITI. Then it became "hey it won't be as bad," and now it's devolved into "have roommates" - as if "have roomates" is a "hack" (literally, the pilgrims did it, I did it in the Marines without using any particular buzz-word, and every 19 year old college student knows the trick... some hack).

None of this means it's not worth trying, just a reminder that as something moves from "niche" into "mainstream," that means demand for that thing, whatever it is, is going up, so eventually it's not actually any more or less likely to produce a particularly phenomenal outcome than any other mainstream approach. You can still knock it out of the park, it's just not particularly likely or unlikely, relative to everything else that everyone knows about.

So what's next? :P

Most of my clients with one rental property do not have a lawyer, do not have an LLC, and use a normal CPA.

You aren't Donald Trump. (Yet?)

 There are six different calculations of rental income specified in the Fannie Guidelines, the last time I counted. It's dictated by the scenario. If you call two loan officers and describe a very slightly different scenario, it's possible they both recited back correct information, for the scenario described, and neither is wrong. And for many real estate investors, different calculations are applicable to different rental properties, so often there are multiple algorithms in play concurrently. 

I mention that because your post contains none of the information that would be needed to know which calculation is applicable. 

As a real life example of that, read this very thread. At a glance, every single person is correct for at least one of the scenarios that's commonly encountered, even though they are all describing different math. So if the question is "They are all giving conflicting information, who is right?" the correct answer is actually "yes!" 

Pragmatically, it's not much use for you to learn each of the half dozen different ways and when they are applicable. Your focus should be on if that loan officer is in-state and has done a bunch of REI loans before.

Similarly, there's no point in me learning the 3 or 5 different types of root canal. What I care about is my dentist not messing up my grille or subjecting me to unnecessary pain.