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.
Short Method
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.
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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.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
4 Responses
We do AUS and we’ll take line 20 + add back ITIA (interest, taxes, insurance and HOA) – 12 months PITIA x .75 / 12. = rental income. A bit more conservative in most cases when HOA is not a factor.
Hello
That is an interesting approach, in my opinion using this method would either turn down qualified borrowers in some cases and approve unqualified borrowers in other cases but never is accurate. Since you are taking away 25% of either the loss or the income which is not mandated by the guidelines, the agencies would not say anything about taking away 25% of qualified rental income(since it would better the ratios). BUT if you are only using 75% of the loss the borrower should qualify with this means that your are not fully qualifying the borrower with all their debt. For example if the loss was supposed to be $500 per month but your 75% rule lowered the loss to $375 per month , this would cause higher ratios then you submit which would make your company liable in a buy back for not following written guidance laid out by FHLMC.
That all being said, if you don’t sell to FNMA /FHA/ FHLMC I suppose that might be the way the want it. Thanks for the feedback!
Michael
Forgot depreciation along with ITIA
Agree, however, desirable in secondary market. We actually sell to Freddie Mac. You’ll also be surprise the low rate of declines (under 1%) based on the exclusion of the 25% operation cost. We are the fifth largest mortgage lender in a national level. Then again, our target borrower is A paper conventional.