Question about using capital gains income for meeting Ratios on conforming loan/Heloc

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Question about using capital gains income for meeting Ratios on conforming loan/Heloc

Justin Summers
Member since 2020 · 65 posts · 17 votes

I am looking to get a HELOC on my primary residence. The line will be over $500k so most banks process it similar to a regular home loan. It's been about 20 years since I have gotten a mortgage since I usually pay cash. I have rental income and have 30 paid off properties.. I buy 5-8 new properties per year and sell 2-3 of my rentals per year for income.. Since this is capital gains income I know it's looked at differently. I heard the banks and also Fannie may now allow capital gains income to be included as qualifying income for getting a loan. I have been told average of the last 3 years returns if it's consistent they will use it. I have a few questions.

1. Will underwriters use Year to date Capitola gain sales into that average? Or are they allowed to do this under Fannie Mae? or just filed tax returns capital gains for the average? 

2. Will an underwrite add a property sale into the average that was sold and reinvested in a 1031 exchange?  for example if I bought a property in 2019 and sold it in 2023 for $100k capital gains profit but reinvested in another rental through a 1031 and didn't pay taxes on it in 2023? Would they still add that to the average capital gains? 

Most loan officers don't know these questions so I'm hoping there are a few underwriters here or more knowledgeable loan officers.

Thanks

Justin

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  • Ty CouttsBusiness Member
    Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes
    2y

    Hi Justin, you have a complex financial situation, and your questions touch on detailed aspects of how capital gains and 1031 exchanges are treated in mortgage underwriting. 

    Use of Year-to-Date Capital Gains in Income Averaging:
    Fannie Mae allows for capital gains to be considered as qualifying income if it is recurring and consistent. Typically, underwriters will use an average of the last two or three years of filed tax returns to determine this income. Year-to-date capital gains can sometimes be included, but this depends on the consistency and nature of the gains. The underwriter will need to see proof that these gains are consistent with past income and not one-off events. If you can demonstrate that your year-to-date capital gains are in line with previous years and you have documentation to support this (such as brokerage statements and tax records), an underwriter might include it in the income average.

    It's crucial to work with a knowledgeable mortgage broker or loan officer who understands your unique financial situation and can navigate the complexities of underwriting capital gains income and 1031 exchanges. Comprehensive documentation and a clear explanation of your investment strategy will be key to securing the HELOC. I would love to speak over the phone to answer questions or discuss the HELOC and if I can help. Please don't hesitate to schedule a time using the link below.

    https://calendly.com/tycoutts

    [email protected]719-641-5169
    Ty Coutts - Aslan Home Lending 543 Reviews
    WebsiteView Page
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  • Justin Summers
    OP
    Member since 2020 · 65 posts · 17 votes
    2y

    Thanks Ty- Submitted a call in your schedule for 3:45 today or feel free to call earlier if you are free.

    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    Helocs can be a bit all over as most of the banks/lenders that offer these portfolio them rather than sell them. Banks will have their own overlays on top of the Conventional guidelines for something like this. Also, the particular underwriter or team writing your file will have a fair amount of discretion with this. 

    For instance - for a Conventional loan (not heloc), at a minimum, my UWs would take the most conservative approach and average this over the last two years. They'd also want an LOE and to see the other holdings in the portfolio to make sure there are sufficient assets for this process to continue for at least three years into the future. They also probably wouldnt be happy about this setup, so there would be probably be fight with them over-stipping the file. 

    For 1031s, my understanding is that it is not income - its not available to you because its being deferred into a new asset - so it would not be included in your average. I've havent had that particular scenario go through an underwrite yet, so that one is a toss up without asking my UW team. My guess is that it would only hurt you - an UW wouldnt include any 1031 gains to increase the overall average, but may try to use them to lower the average if the 1031 gains were lower than the average. 

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  • Justin Summers
    OP
    Member since 2020 · 65 posts · 17 votes
    2y
    Quote from @Patrick Roberts:

    Helocs can be a bit all over as most of the banks/lenders that offer these portfolio them rather than sell them. Banks will have their own overlays on top of the Conventional guidelines for something like this. Also, the particular underwriter or team writing your file will have a fair amount of discretion with this. 

    For instance - for a Conventional loan (not heloc), at a minimum, my UWs would take the most conservative approach and average this over the last two years. They'd also want an LOE and to see the other holdings in the portfolio to make sure there are sufficient assets for this process to continue for at least three years into the future. They also probably wouldnt be happy about this setup, so there would be probably be fight with them over-stipping the file. 

    For 1031s, my understanding is that it is not income - its not available to you because its being deferred into a new asset - so it would not be included in your average. I've havent had that particular scenario go through an underwrite yet, so that one is a toss up without asking my UW team. My guess is that it would only hurt you - an UW wouldnt include any 1031 gains to increase the overall average, but may try to use them to lower the average if the 1031 gains were lower than the average. 


     Patrick- Thanks for your feedback and wealth of information. 

    1Reply
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