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Self employed people and rental property owners have been getting turned down for loans since 2008 in illogical , irrational and unreasonable ways.
The reliance on computer systems has gotten more complex.
The reporting requirements have increased
Two Year Lessor or Average Numbers get overridden by single quarter run rates
Instead of apply 75% rental factors, a shift to allowing operation income for established properties sounds good on the surface, but it gives unethical LO's the opportunity to use false denials for A Paper Borrowers for up sale opportunity.
The goal of this website is to prototype a system for sharing loan application information in a better way than email or uploads. It provides a more dynamic system for communication and data crosscheck among all parties.
H and I have more than one or two unusual items in our file that will require additional documentation. Sharing that information can be challenging via email and phone and making sure what was shared got entered into another system properly is impossible without this.
If we can get proper math into these automated underwriting systems, even with extremely conservative adjustments, our home loan should be a no brainer. The problem?
Everyone seems to struggle with the rental property math when there are partnerships involved and
______________ { you fill in the blank }
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Dear Loan Officer -
Holly is a PhD Scientist and Bryan is self employed with 20-25 years experience in the three areas of self employment.
We have prepared our documentation in accordance with the guidelines set forth at www.borrowers-barnyard.com.
We feel we should qualify for A paper lending. It will require more special handling and/or exception documentation than is desirable, but drafts of all docs we can imagine needed have been pre-prepared and are available on the Borrower Docs menu for your access and review. Please see the home page for our Qualifying Income worksheet and the Qualifying Income Calculator/Simulator.
Regards,
H and B
Co-Borrowers
Co-Borrowers
Holly Bowers
PhD Scientist with 25 years in her field on w2
2021 run rate - $64.456 from US w2
2020 income - $52k from US w2 and $50k in int'l consulting
2019 - $61,813 from US w2
NOTE: She bought into a rental property Bryan owned in February 2021 that should return $7k+ in income to her that she didn't have in 2020 or prior...
Bryan Canary
Self Employed 20 years. Real Estate, Construction and IT
$21k annual income from 3 schedule C's (using 2 year lesser or average analysis)
A landlord for 22 years with four remaining rental properties in Baltimore.
We figured out all I needed to show was $35/month in Net Operating Income from my rental properties to get this deal done. And there's only one year in my 22 year rental career in which that might have been anything more than a passing thought. Then they called it a COVID year...
The Deal...
The Deal...
Purchase: 12 Bayview Road, Castroville CA 95012
Contract Date: 3/30/2021
Amount: $900,000 (actually 895,000 but keeping numbers round for communication)
Seeking
"A" paper loan.
35% down at 3.125%
$315,000 down payment
$585,000 financed
A Simple way to look at the math...
A Simple way to look at the math...
To obtain this loan we need a max borrowing power of $3593.
Since 1) we have no other long term debt other than rental properties 2) we are putting more than 20% down and 3) we have cash reserves after putting our money down, we "just" need to show our gross monthly income is in excess of $7186/mo. ($3593/0.5)
So. The goal is to show that Holly and Bryan combined make at least
$7,186 in monthly income before taxes...
Holly's run rate for 2021 is $64,456
That is $5,375/month in gross income.
7186 - 5375 = 1811
Thus, Bryan only needs to show he makes
$1811/month in income to qualify!
Thus Bryan only needs to show he makes
$21,732/year in income to qualify!
Bryan's Schedule C's - $26,038
$26,038 is GREATER THAN 21,732!!
They more than qualify right!!?
NOPE...
Bryan's 2 year "Less or Average" Income
from his Schedule C's is $21,316
That only equals $1776/mo...
1811 - 1776 = $35 short per month...
We only need $35/month in rental income and the home is ours!!!
A no brainer, right?!
Well. Actually it is, but not without some thought...
We only need $35/month in rental income and the home is ours!!!
A no brainer, right?!
Well. Actually it is, but not without some thought...
Bryan's 2020 rental year was his worst year in his 22 year history as a landlord.
In 2020, Bryan lost $430/month on his rentals ?!?
So they don't qualify, right?
Incorrect by a long shot...
And here's where this story takes a very interesting and educational turn, all over a search for $35 in monthly income.
$35/month is just one medium metal butterfly sale a month on the books. If only I had sold a bit more metal art in 2020, this would be a non issue, as that's all that was really missing...
If we just look at Bryan's Rental Properties for 2020 1) without consideration for a refinance on 621 Wyeth St. that transpired in 2021 and/or 2) without context for a huge loss on 627 S. Paca St that is greater than anything he experienced in his prior 22 years prior, one might rush to a false conclusion...
627 S. Paca St - Most people would start focusing on (2). What caused 627 S. Paca St. to lose $13,150 in a single year? If only I could blame this one on Barry Diller, but alas, that was the hot story a few years ago. That actually can be a very good place to start, but in fact, from an underwriting perspective there's something totally off the radar that's transpired at 621 Wyeth St that has netted them way more than $35/month income without the need to sling the metal art.
621 Wyeth St
A Refinance in February 2021 increased their
rental income by $15,349 per year moving forward
621 Wyeth St
A Refinance in February 2021 increased their
rental income by $15,349 per year moving forward
621 Wyeth St has a very consistent two year rental history. In fact it has a 14 year rental history that is comparable.
In February 2021 Bryan and Holly refinanced this home from a traditional mortgage into a Home Equity Line of Credit in First Position. Most small investors don't realize you can get HELOC's on rentals, especially HELOC's in 1st position. You can.
The home appraised for $262k. The balance on the home was $188k. The Max LTV for the HELOC was 80% so we were granted a line of credit for $209k . At time of refinance, $188k was drawn from the HELOC to payoff the first mortgage. Then Holly transferred $188k she had sitting in her bank account earning no interest into the HELOC account paying that down to ZERO. And that's how you become your very own banker.
2019 and 2020 PI Value - $1279/mo (5581 principal + 9767 interest).
2021 PI Value - ZERO.
There is no longer any principal or interest payment.
This means their Net Operating Income went up on the property by $15,348 annually ($1279/mo x 12) .
This is like getting a permanent raise at work and must be included in any current qualifying income calculations for future loans.
Yes. The entire 2nd floor hallway is a wrought iron catwalk!
Thus, to properly evaluate 621 Wyeth St income from this point forward, the Underwriter now needs to adjust for the new PI value of ZERO. It would be fully illogical to evaluate Bryan and Holly for a loan today that included the assignment of a $1279/month housing expense that no longer exists. (expand for lesson on Net Operating Income Calculations and numbers specific for this scenario)
Net Operating Income Calculation Defined...
Net Operating Income = Gross Rents - Housing Expense - Operational Expense
Gross Rents -- are what you take in for rent.
Housing Expense -- The sum of Principal, Interest, Taxes, and Insurance (PITI). You would also add Home owners insurance, ground rent and anything else that is a required part of paying for the home itself as opposed to its operations or upkeep.
Operational Expense -- All expenses that are not Housing Expenses. Cleaning. Maintenance. Repairs. Advertising. etc...
Net Operating Income Values...
Gross Rents = 1800/mo (21,600/12). This has been constant for more than 2 years.
Housing Expense =$382.50/mo (0+0+3652/12+938/12) (aka PITI)
Operational Expense = $10/mo (115/12) (if a 2 yr avg is used they are $68/mo)
To get our "adjusted" NOI for underwriting purposes, we need to "re-calculate" the NOI.
2020 Adjusted Net Operating Income for 621 Wyeth St
1) Rents - Do we use current rents for this or do we use 2020 rents? Current rents make sense but it's unclear what the bankers do. In this case current, 2020 and 2019 are all the same, so it's a non issue. $1800/mo.
2) Housing Expense - We have our new housing expense calculated as $383/mo (0+0+3652/12+938/12) See collapsed section above fore details.
3) Operational Expense - Do we use 2020 operational expenses as a baseline or do we use an average of 2019 and 2020.? In this case not much difference. We are going to use the 1 year history for now which was $10/mo (115/12) . See collapsed section above fore details.
2020 Adjusted NOI = 1800 - 383 - 10 = 1407 /mo = $16,884/yr
as compared to $1,547/yr with 2020 taxes only...
If everything else stays the same for 2021 and only this PI changes, their current income run rate is $10,187 vs -$5,162.
They have created $16,884/yr in income ($849 in monthly income) with a refinance and the money to pay down the HELOC. Simultaneously they have become their own bankers for up to $209k in credit on an as needed basis.
They were only short $35/month in qualifying income.
They now have $849/monthly in income with an adjusted analysis.
They should qualify easily with no further questions asked...
This could be presented in a data table one of two ways.
It could be represented by "Adjusted" evaluation of 2020 (2020adj)
It could be represented by a "Projected" evaluation of 2021 (2021p)
The two tables are identical.
Only the Column names are different.
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I would prefer 2020adj as the vocabulary versus 2020 projected because there is no way 627 S. Paca St
will do a repeat of 2020.
That value can only get better in a "projected" data table.
627 S. Paca St
A very lucrative 15 year vacation rental wiped out by COVID.
In September 2020 the Property transitioned to a lease based rental to avoid future issues...
627 S. Paca St
A very lucrative 15 year vacation rental wiped out by COVID.
In September 2020 the Property transitioned to a lease based rental to avoid future issues...
For starters, don't let the $1087 annual income on 627 S. Paca St in 2019 seem mundane.
That is Net Operating Income AFTER paying $13,472 off in principal for the year...
If you don't understand how Net Operating Income is calculated, you won't realize you can't tell anything
about how much someone really "makes" from this type of underwriting analysis or investment ...
From 2006 to August 2020 this property was in service as a very lucrative Urban Vacation Rental. The home served over 1000 groups from all over the world. The nearby attractions include the Baltimore Convention Center, Camden Yards, Raven's Stadium, and the Inner Harbor. Guests also came in for Family related events, graduations, and medical procedures, but the bulk of the business was business travel related. . Top sales month ever was $8495 in May 2014. Top sales year was $62,570 in gross rents in 2014. Not bad for a 2100 sf row home...
January and February 2020 were slow as usual. Then from March to May I did zero business and had cancellations for the entire summer. I was forced to take Pandemic Related Unemployment that was available for self-employed people affected by COVID. Unfortunately, for underwriting purposes, that is not allowed to be used as substitute for lost rental income. By August I realized the Vacation Rental Business was too risky to continue on. I took my COVID unemployment money, I flew back to Baltimore, and I spent 90 days reconfiguring the home to turn it into a far better setup for a traditional rental. Two of the bed rooms needed more audible privacy as the home was initially very open as part of the loft design.
The lease based rental business started proving itself in November and December. My Current Leases in hand are for $3375/month and with a new lease starting my leases in hand will be $3425. The sales numbers for November and December are a little high as they included multiple month payments in some cases. I have individual leases with each tenant as opposed to a single lease with multiple tenants for the entire whole. This has become far more normal in downtown Baltimore since 2012. An increased instability in employment accompanied by rising rents seems to have made this a more popular option for the working adults and graduate students who rent downtown. My rental is a little unique in that it is fully furnished. There is a niche there that is under served that commands a premium over unfurnished homes. This also helps protect my property as most damage is done during move in and move out and it gives me an excuse to pay a cleaning person to get in there every 3-4 weeks to keep the home in top condition.
Because every home needs a catwalk!
With my current leases, I'm on a run rate of $40,500 in gross rents.
$40.5k is far less than $57k that I did in 2019 or is it? Actually it's about 20% less than what I was doing in the vacation rental business, but far less headache and stress.
That 57k in gross income included about $9k in cleaning fees. I can see that by $57,781 on tax journal - $49755 from my reservation system for bookings.
The total cleaning and maintenance was 15k, so I kicked in an extra $6k which likely should have been capitalized instead of expensed. That was one of several communication errors with my prior CPA that has recently come to light.
$40.5k is FAR more than the 26k I did in 2020.
I never expect to do 2166/mo in rent again on this property (26,022/ 12) . That's just illogically low.
The cleaning expenses and other operational expenses from 2020 are about what I'd expect to see in 2021
If we just subbed out $26,022 for $40,500 we get the projected totals to the right... ( -13,150 + 14478 = 1328)
While this is about what I expect to see, no clue how to make an underwriter feel okay with that.
In my opinion, the proper way to analyze this property for underwriting is to use my current rents and apply a 75% rental factor. Alternatively they can force me to get a rent schedule done by an appraiser and apply a 75% rental factor to that, just as they would if I was purchasing the home.
Oh. But wait. I don't even have to do that do I. As an underwriter, I can just pretend they are going to repeat 2020 again for 627 and they still qualify as long as I properly adjust PI for 621 Wyeth...
Surely we've qualified by now.
We've shown how a $-5,162 annual rental income is not remotely relevant AND we've shown that reasonable projections for NOI for 2021 based on required and logical adjustments for two properties results in $24.6k annually.
That's $2055/mo and we only needed to show $35/mo in additional income.
Surely we've qualified by now.
We've shown how a $-5,162 annual rental income is not remotely relevant AND we've shown that reasonable projections for NOI for 2021 based on required and logical adjustments for two properties results in $24.6k annually.
That's $2055/mo and we only needed to show $35/mo in additional income.
Did you say we needed more income?
We just got a perfect comp for a 627 S. Paca St. refi that will up our income by an additional $6-10k in annually...
625 S. Paca St is the sister property to 627 S. Paca St.
Bryan and Holly lived in it from 2006 to 2012
He sold it in 2018 for $423k and it just resold for 449k on Friday April 3.
We can try to rush through a refi if needed,
but my goodness, aren't we getting carried away now.
We are over qualifying now for sure...
Now comes the nasty surprise....
Now comes the nasty surprise....
Given the info I've shared above, can you imagine my surprise and confusion when a woman with more than 20 years in business who is the referral contact for a Silicon Valley Real Estate office for one of the largest national real estate companies in the United States delivered this email response to me at 6:10pm on 3/30/2021?
Her math says we have a maximum loan amount of $350k with $400k down?!
HUH?! Holly alone qualifies for almost $500k in borrowing power if I'm left on the curb....
This woman only needed to be able to find $35/month in NOI when totaling my 4 properties together AND she knows I have refinanced 621 Wyeth, Modified 627 S. Paca for a lease based rental, and 627 has a $1000/month principal payment that can be easily refinanced to reduce my PI by over $700/month...
AND this is what she offered?
Could she be that bad with math? Could she have mis-entered information in her system?
Could she be taking my 2020 tax returns at face value where my highest producing rental for 15 years was off on
rental income by $30,000? Is it possible she knows how to qualify us with ease and she just doesn't like the work it would take to
document our income and assets? Or... maybe she just wants to make more money doing less work...
This is the type of craziness I've been dealing with as a self employed person and a small real estate investor for a very long time...
This example is one of the easier ones to see, but this is the type of craziness I've been dealing with for a very long time...
My first call with the woman mentioned above went very well. A follow up call 30 minutes later after she had a small amount of information in her hands that I sent via email was a different story completely. It was about the same feeling I had gotten from 5 others in the industry prior to building this website.
I surmise she looked at the work required to get us qualified without considering my ability to provide documents and had already ruled us out for A Paper financing. Not because we couldn't qualify, but because it would be more work than was desirable and we might suck at providing proper documentation. As a result I continued to look for a better loan contact. On 3/29/2021 I found a new contact and I'm really hopeful this works out for us. Their first set of questions back to us was spot on and I tried to convey information via email succinctly. The response from the woman above prompted me to build this website.
How would you feel if you knew that less than half your income was going to be allocated for qualifying income, and a half dozen loan officers, all with 20+ years experience wouldn't help you with a loan for one reason or another...
Would you attempt to change that system or break it for the better too?
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