How to get around 2 year Schedule E requirement with assets?

[TXLandloring]

What are other people doing to get around the 2 year Schedule E tax return requirement to count the rental income towards mortgage qualification?

I'm not new to being a landlord -- just been out of the landlord business for the last 5 years.   I recently got back in the game and was able to qualify for a mortgage for the first rental property on my own income.   I happen to also own a second rental property 100% free and clear.   I have additional assets available.   My credit score as of 4 months ago was 800+.   Both properties are rented and first lease is not up for renewal for 18 months from now.

I just don't want to use all of my money -- I would like to refi the second property and/or use that for collateral against a mortgage on a third property.   But I continue to run into the hard and fast rule that you have to have the most recent 2 years of Schedule E's.  Talked with some smaller banks and of course my regular big bank (who I've had a mortgage relationship with for 10+ years), and no one wants to play ball.

I guess next stop is a mortgage broker, but not sure how best to find someone with this type of experience.   Ideas on how to proceed?

[andydallas]

you should get to count 75% of the rental income toward DTI until you get to two years, after two years they base it on the income/expenses of the property because you have history with that property....thats my experince anyway

andy

[BLL]

What type of additional assets do you have? The bank will be more willing to lend if you were to put a few hundred thousand dollars under than management.

You can also try the private money route and avoid the banks all together.

[TXLandloring]

you should get to count 75% of the rental income toward DTI until you get to two years, after two years they base it on the income/expenses of the property because you have history with that property....thats my experince anyway

andy

Well, you would think I could count it, but everyone is sticking to the 2 year Schedule E rule.   

[TXLandloring]

What type of additional assets do you have? The bank will be more willing to lend if you were to put a few hundred thousand dollars under than management.

You can also try the private money route and avoid the banks all together.

My biggest single asset is that free and clear house that I rent.   The other assets are your typical retirement and taxable investment accounts that I have and are in the 150-200K range.   I've looked at Private Money lenders, but the interest rates they charge all but make it impossible to make any money on a property unless you are only looking for a short term loan, and I'm looking to do something long term for the cash flow.

[BLL]

Have you asked about a loan back by a CD held in the bank? For example, buy a 100K CD and ask the bank for a 100K loan backed by the CD. I have seen people with no income get loans when they deposited substantial funds in the bank.

[Dave T]

I am confused.  What is the problem with giving the bank the last two years tax returns?  In the past, I have gotten financing even when I had property that was too new to even be on my first Schedule E.  As I recall, the lender used my current leases and a statement from my property managers for whatever documentation requirement the lender needed to verify the rental income.

[HPM]

Get a HELOC on the place you own free and clear.  You shouldn't need schedule E's for that. 

[d1beard]

The poster is asking about the standard conventional loan requirement now that you need 2 years of landlording experience to be able to use the rental income:

http://www.freddiemac.com/learn/pdfs/uw/rental.pdf

If you can't qualify w/o using the rental income, you'll have to go to smaller banks and use their portfolio loan product until you have the landlording experience established (though even some of them have tightened up quite a bit, so you may need to call a bunch).

[HPM]

Have you asked about a loan back by a CD held in the bank? For example, buy a 100K CD and ask the bank for a 100K loan backed by the CD. I have seen people with no income get loans when they deposited substantial funds in the bank.

Why would you want to do that? If you have 100k to put in a low interest rate CD, just buy the house with cash.
Of course a bank might do this but why would a consumer want to give money at a lower interest rate just to borrow it back at a higher one?
Am I missing something?

[Dave T]

The poster is asking about the standard conventional loan requirement now that you need 2 years of landlording experience to be able to use the rental income:

Tje Schedule E requirement only applies when the borrower needs the rental income to qualify for the loan.

If a lender is following the Freddie Mac guidelines, then rental income is only required on one Schedule E.  If the rental income is needed to qualify and it does not appear on a prior year Schedule E, then other documentation may be used to verify income provided the borrower has at least two years of landlording experience.

[Dave T]

Why would you want to do that? If you have 100k to put in a low interest rate CD, just buy the house with cash.
Of course a bank might do this but why would a consumer want to give money at a lower interest rate just to borrow it back at a higher one?
Am I missing something?

You are overlooking the effect of compounding.  As a general rule, if the interest rate spread is 2% or less, you earn more interest on the lower interest rate CD than you will pay in interest on the higher interest rate loan over the same period of time.