Conventional Loan Confusion - 4+ Mortgages

[Jay Ganz]

Hi all. I currently have 4 properties mortgaged and am trying to obtain funding for a 5th property (and so on and so forth), however, something interesting happened when I was going through pre-appoval in that my losses from my rental properties negatively effect my overall debt - income ratio, which in my mind doesn't make sense. I am spending money to fix properties, yet, when I go and try to obtain more funding those "losses" are going to have an adverse effect? Can someone please explain this better than my mortgage broker did? 

"it appears with your loss on xx property , we have to hit you with the full monthly liability & the loss you take – so it throws off your debt to income …cant approve you at this time … maybe after 2017 taxes are completed we can revisit …. Thank you" 

[Chris Mason]

Hi @Jay Ganz,

Couple possibilities.

1) Lender error. Even when it shows in the red on the paperwork, barring overlays, we still don't have to hit you with the full PITI. If your PITI is $2500 and your paperwork says you're in the red $75/mo, we hit you with the $75/mo that you're in the red, not the $2500/mo. And these things offset each other, so if you have this $75/mo in the red property, and another $100/mo in the green, that nets out to $25/mo in the green.

2) Lender error. Not adding back depreciation.

3) Tax professional "error" (which is in "quotes" because I am not a tax professional, and thus not qualified to say it outside of quotes). Rather than depreciating big ticket capital improvements over several years, which has no impact on DTI after it's "added back," they wrote off the big ticket one-time improvements as if they were regular annual expenses. Lenders can not "add back" regular annual expenses, only the big ticket one time things that you can depreciate. I'm sure you can intuitively understand how a $40,000 deduction on the wrong line can screw up your mortgage application even if it doesn't impact how much in taxes you pay, yes?  And you can say "hey, that makes no sense, everyone knows you don't buy a new roof every single year!" and have a valid point, and on rare cases, on an exception basis, we've been able to get loans through with that question in mind, and incredibly thorough documentation about the nature of the renovation work (eg, your GC better had written "new roof" on the invoice for the new roof, and not "roof work," and it better say "brand new water heater installed, replacing old water heater" and not "water heater work", and hopefully you actually kept all of this paperwork).

4) You truly are buying up a bunch of cashflow negative real estate, in which case there is no error, and this should be revisited after you've taken care of business with regard to your current homes, before looking at additional homes.