Qualifying for HELOC with self employed income

[Mikey Schaefer]

My day job is a photographer and cinematographer, I have an LLC for that work that files taxes as an S-Corp. I generally pay myself a reasonable W2 salary (about half of Business income) but 2020 was a bit different. My work almost completely vanished (due to covid) so I drastically reduced my W2 salary from my LLC as I wasn't sure how long till my work would came back. My business also makes a bit on photo licensing and equipment rental income, which continued to bring in money all year. My business net at the end of the year was about the same as the previous year but I ended up mostly taking owner draws instead of w2 income as I wasn't actually doing any work (yay for passive income!)

The couple jobs I had in 2020 paid me through a production company in W2 wages. ( Production work is a bit weird and depending on my role sometimes it is 1099 and sometimes I’m hired as an employee even if gig is only a few weeks).

I recently applied for a HELOC on a rental property that I have about about $400k of equity in. I gave the broker my ballpark income ( Business net, additional W2 income, and rental income). My credit score was 815 when I applied. We decided on a loan amount that would put my DTI around 45% if I drew the total amount of the HELOC. All the numbers sounded good to the Broker and I shouldn't have any problem qualifying.

Well the underwriter had a very different take on my total income. He would only accept the W2 income from my LLC and the rental income to calculate my DTI. This shot my DTI up to well over 100%. My schedule K-1 clearly shows my net business income but my accountant didn't file a Schedule L showing my owner draws (if the gross receipts of the business are less than $250k the IRS doesn't require this to be filed). I sent banking statements from both my business and personal accounts showing the matching draws/deposits but this wasn't adequate for the underwriter. Only way he'd accept the income was if it was shown on a schedule L. Only way for me to do that would be to file an amended tax return. Last year I had to amended my 2018 return and that took about 10 months to get processed. So not really a great option to do the amended return.

The underwriter also wouldn't use the non LLC W2 income as I was no longer employed there and said "side gigs" can't be used to qualify. It is the same line of work I always do. I showed pay stubs from work I've done this year which is more than I had in 2020. Again that didn't seem to matter. I was denied the loan.

Broker is saying that the decision is based on Fannie Mae self employed rules. I’ve gotten a couple mortgages and done a refinance in the last few years and had to take some time explaining all of my income but ultimately the underwriters always accepted it all.

Does anyone know if there were some bank overlays being applied to my situation (I couldn’t seem to get that info) or these are just the Fannie Mae rules getting used?

And secondly does anyone have any recommendations for a lender that will do a HELOC on a rental property that isn't backed by Fannie Mae and is willing to do a little work to understand my income stream?

The rental property is located in OR and I’m located in NV.