A few months ago we posted a blog focusing on the differences between the rental calculations for other properties the borrower owns when using either FNMA vs FHLMC (REO Showdown Fannie vs Freddie). Since that posting I have had some great conversations with some of our current UberWriter customers and our loyal blog followers. Some people agreed with the blog, and some did not. This prompted me to get on the phone with FHLMC and attend some of their direct training sessions to dig down and get some answers and determine why the industry had such different views of the guideline.
FHLMC’s Two Method Approach
What I found out was FHLMC will accept either method shown discussed in the blog. I was surprised by the answer in the research and what seemed to be inconsistency. But on my last call to FHLMC the knowledgeable customer service representative was able to clearly explain why, and this is what I want to pass along.
According to FHLMC the key to knowing what method to use is asking the question “Are you considering the properties PITI in your debt to income ratio”.
If your LOS is including the properties PITI in the borrowers DTI, then use the longer method, if the LOS can ignore the actual PITI you could use the shorter method described in the FHLMC section. In my experience most LOS’s do not have the ability to ignore the properties PITI without long tedious work arounds.
To make sure we are on the same page the shorter method (if your system can ignore the PITI) is to use the borrowers SCH E line 21 + Depreciation divided by twelve-month. If your LOS can not ignore the PITI of the property in the debt ratios use the longer method. This method is to start with gross rents (line 3) minus expenses (line 20) and add back in HOI, interest, taxes, and onetime expenses. After you add that portion of the SCH E review the next step is to divided the Schedule E total by 12 then subtract the full PITIA of the property, and this final number is your rental income.
To handle this difference in calculation, effective immediately in our UberWriter software we have a new check box that gives this flexibility for clients to use the method of choice when FHLMC is the chosen investor and you are working out rental income.
With the question “Do NOT use Full PITI in ratios” unchecked
UberWriter will use the calculation adding back interest, taxes, HOI, and one time expenses
With the question “Do NOT use Full PITI in ratios” checked
UberWriter will use the calculation only using line 21 adding back depreciation only
I want to thank everyone for their feedback on this issue, it is discussion like this that help us fine tune UberWriter to be the best single platform income calculator in the mortgage business.