I am an underwriter looking at a submission from one of our lenders. Your cashflow worksheet includes a ‘payment adjustment’ column on the rental worksheet. When it comes to residential rentals, what goes in the payment adjustment column?
The payment adjustment column in my rental worksheet is deliberately vague because lender guidelines vary. Here are some of the options…
Examples of mortgage payment guidelines:
- Some users do a global debt coverage ratio. They use the payment adjustment column to add back interest. The cashflow result is the contribution from the rentals toward global cashflow to pay all debt.
- Some users want to know the net cashflow contribution from the properties. So they will add back interest and subtract principal.
- Some users have a shortcut. I have seen them add back interest and subtract 110% to estimate the payment. Or interest divided by 85%.
- Some users leave the interest in and don’t worry about the principal. FNMA used to do it this way.
The worksheet is flexible
Since the user guidelines are the key, the user decides what goes in that column. If you are looking at a worksheet from a lender, click into that cell and see if there is a formula that has been used. Can you see that they have added back the interest and subtracted another number? Or divided the interest by .85? That may give you a clue.
The importance of comments
Every page of my handouts includes a place for comments. And on the rental worksheet there is a comment column for each rental. I encourage anyone using the worksheet, if you ever have to calculate a number that goes in a column, to make note in the comment column what you have done. That way the next user, in this case Dave, can tell what has been done.
Our Quick Reference Guide
If you don’t have the Quick Reference Guide yet, I highly recommend it. Whether you use my worksheets or not, you’ll get some good guidance on what numbers to use, what to ignore and how to use the numbers to calculate qualifying cashflow.
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