Got denied for a stupid technicality - Please advise,Really weird

[Yoni R.]

I am purchasing an SFR under a conventional mortgage. I also currently own (100% ownership) a multifamily building which I have a mortgage on. The building is owned by an LLC not by me personally. Due to me being the sole owner of the LLC there is no need to file a tax return for the LLC so it appears directly on my tax return and not as a K1.

The underwriter for the SFR loan I am getting said that they cannot exclude the multifamily mortgage from my personal return because it appears on schedule E and not as a K1.

This doesn't make any sense to me as it is a a separate entity and the building nor the mortgage is owned by me personally. I even asked the underwrite if I had 99% ownership of the LLC and 1% someone else and I would receive a K1 would it then be excluded. His answer was yes. He even told me it's a stupid technicality but that those are just the guidelines.

Does this make sense or is it just this specific mortgage lender not understanding the guidlines?

[Chris Mason]

Quote from @Yoni R.:

Quote from @David Kelly:

Just to confirm, the multifamily mortgage does not show up on your personal credit report, correct?  

That is correct. It’s a non recourse commercial mortgage under my LLC. What’s weird is even the underwriter said it’s just a technicality and understood how stupid of a situation it was. 

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.