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

[Justin Summers]

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

[Justin Summers]

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.