1 rental is vacant, in contract on another but the bank is ...

[Brian Garlington]

1 rental is vacant, I'm in contract on another but the bank is asking me to provide lease docs on the vacant unit and I'm concerned at what the ramifications may be if the property isn't rented out even though I have the seasoning to cover it being vacant for the next 2 years if need be.

I have two rentals here in the Bay Area,.....one is a condo and the other is a duplex I'm "house hacking" with. (For those of you that don't know, this means I'm living in one unit and I have a tenant in the other unit. Both of these rentals have had the same tenants since 2016.

In November of last year I purchased my first out of state property, in Cleveland, and at the time the duplex (We'll call it Address A) had one tenant in it. (I've subsequently had to evict that tenant because she was playing to many games with getting the rent money to my property manager.)   We evicted her last month.  When fully rented, this duplex meets the 3% rule. 

I am now in contract for a 3 unit deal in Cleveland at "Address B", using the same lender as before, and this time what I'm buying has tenants in all three units AND they are all long term tenants that have been there between 4 and 12 years. This 3 unit deal also meets the 3% rule, passed the home inspection with flying colors, etc.  (I love those motivated sellers that want to liquidate their entire portfolio.)  

We have a tentative closing date of March 7th and just now the lender has asked me to provide lease documentation as to what sort of rent I'm collecting from (what they don't know is) the (vacant) duplex at "Address A". 

As an FYI My FICO is above 700,....I have enough seasoning in the bank, literally zero credit card debt because I pay them off in full each month and if I count only 75% of the gross rental income I'll be collecting from "Address B" then that covers the mortgages, property taxes, insurance, escrow and the 9 percent property management fees on BOTH "Address A" and "Address B" with money left over. 

Does anyone have any experience as to what they think the lender may do? 

Will they simply say,...you have enough seasoning....just get it rented out before you buy a third property utilizing us.

Will they say...instead of putting 25% down, we'll want you to put 30% or 35% down.

Will they say instead of charging you 5% interest we'll need to charge you 7% interest.

Any thoughts or ideas will certainly be appreciated. 

P.S. On a side note, for those of you that don't know, it is hard to get tenants to move in Cleveland from November through March because it is COLD AND SNOWING ALL THE TIME. We've actively been seeking renters and we finally do have tenants for both units lined up through a program known as Eden, and we're simply waiting on then to come out and inspect the property. 

[Don Petrasek]

@Brian Garlington regardless of your relationship with the lender, they have to calculate debt ratios every time they lend and document all income.  That's why they are asking for the leases.  If you qualify for the new mortgage without rental income from Address A, there will be no issue.  I'd recommend replying to their request with a letter & documentation if you have it showing what you have received historically and stating you are actively looking for a new tenant (and why you never rented the other unit if that's the case). If you are slightly off on debt ratios, they may be able to use the fact that you're actively attempting to rent the property as a compensating factor.   If you don't quite qualify they may offer you a loan amount that you do qualify for (larger down payment).

Note that unless you are doing commercial financing, the income on the property itself doesn't matter as much as your overall income including net rental income.  Looking at rental income vs price is one indicator of whether or not the deal will work, but not the only one......and as you've discovered the higher the rent as a % of value, the rockier the ride in terms of tenant issues and turnover.

For sure the rental market slows down in Cleveland during the winter, but there are good tenants moving every month due to job changes, getting married or divorced, roommate issues, etc.   You just have to be more patient and expect to put a little more effort into it between about Nov and March

I'm in a suburb on the west side of Cleveland,  feel free to reach out for help or with questions any time.