Wednesday, December 5, 2007

My Stated Income

I've had an attack of conscious lately. Not that I've said or done anything wrong or inaccurate, but I feel that I need to clarify something that I've mentioned on many posts of this blog--stated income loans.

Since this isn't Real Estate Investing 101, I'm not going to patronize you by explaining what a stated income loan is. Sometimes, though, the assumption about qualifying for these types of loans is that the borrower needs to lie about their income. As long as their credit rating is good, then the broker and lender pretend to believe that the borrower is telling the truth. "O---k--a--y," wink, wink, "we'll just go ahead and approve you on this income that you have written here because your credit history tells us that you are such a good risk." Wink, wink.

Let me clarify. First and foremost, the loan on our PR was full doc, 20% down. I don't know what PHH is doing now, but we had almost 10 loans with them at one time and none were stated income (to the best of my memory). As a matter of fact, we would call asking for a non-owner occupied rate, and they would underwrite it as a second home. This happened repeatedly, even though I would tell them over and over again (it's recorded, you know) that we would never, never be living in the house. They'd say, "Sure, fine, got it." Then the notary would come on the day of the close, we would start signing, and, lo and behold, there was the Second Home Rider. We'd stop everything, call the rep at PHH and tell them that we weren't signing the rider. They'd say just to put a line through it and send it in with the packet. Whatever. We didn't sign that it was true, so we had no problem with that.

Let me explain why the stated income loans worked for us. After we acquired our tenth rental, PHH wouldn't allow us to borrow from them anymore. So we had to find another lender. With all of those tax deductions, our 1040 was beautiful to us, but not so to someone thinking of lending us money. For example, let's look at that one year when we sold our rental in San Diego. We cleared almost $300,000, which we considered as income that year. However, we had lived in the home for at least two out of the last five years that we owned it before we sold it, so we didn't have to claim a capital gain. Therefore, this "income" was never even reflected on our tax return. With all of the rentals we had at the time, I think our carry over showed a negative $50,000 on our return. Most of this was in the form of depreciation, so we didn't even feel that part of it yet.

So we tell a lender that we are self-employed real estate investors ("real estate professionals, by IRS definition) and we want to borrow money for another rental. They ask how much we made the year before, and we tell them "$250,000" (if you subtract our taxes from our gain). They say that, since we are self-employed, we have to submit two years worth of taxes for a full doc loan. You see where I'm going with this. Our only proof of income for that year was our closing statement. To use a closing statement, we'd need to take a stated income loan. We didn't lie.

Just had to get that off my chest. Now I feel better.

(As an aside, we almost became victims of a scam yesterday involving our new business. I'll post the details tomorrow.)