Have to FIND TENANT & LEASE before closing my DUPLEX?? First Time Buyer

[Account Closed]

I am about to put an offer in for a duplex in Austin and my lender informed me that I would have to have a rental lease agreement showing the arrangement is in place for at least $1700 rent for my tenant (because I am using the projected rental income as part of my loan) BEFORE CLOSING.

(Currently 1 tenant there on a “month to month” lease for $1450 which is too low for me to qualify). 

So when I don’t even own the house, I have to go take pictures of the inside and have a listing up to find someone and vet within 30 days/before closing??

Is that true??? I was hoping to use the vacant unit for Airbnb or mid term rentals instead…

[Allan Smith]

This is almost unheard of to have to place a tenant at a higher rent bedore buying to get approved. You might be able to force it through, but basically the lender is saying you don't qualify.

kicking out a tenant takes weeks if not months, and they probably have a lease in place where you can't kick them out right away. Then to have to show a property that you don't even own, the owner probably won't even let you do that. 

You need to find another way to qualify for a loan.

[Theresa Harris]

I agree with Allan.  You can't find a new tenant and have a lease for a place you don't own.  What happens if there is a delay on closing or the current tenant won't move out?  Is the second unit vacant?  Talk to another lender.

[Ryan Kelly]

@Account Closed what your lender is saying is you don't qualify on your own without the income generated by both units to help boost your DTI ratio. Now some lenders will use 75% of the proposed market rents for the vacant unit as a placeholder to approve the loan, so check with other lenders to see if they can qualify you. What type of loan product are you using?

[Troy P.]

I agree with all of the above.  The lender is essentially wanting you to go under contract with another person on a property that you do not own.  That is a bad idea.  Using projected market rent to qualify for a loan is one thing, but signing a lease on a property you do not own is another, and potentially illegal, but I'm no lawyer.

[Nathan Faselt]

This dose seem odd I would say this is and internal policy so my guess would be that you can negotiate this as many are saying you are not qualified for there internal guidelines.  

Perhaps  

Precent the bank with your Airbnb market research and proforma/ projections compared to LTR. 

put in more on the down payment 

put money in a reserve account

Ask for a Interest only for 1- 6 months to build up reserves if you don't have it. 

[Greg M.]

You misunderstood what the loan offer was saying. They were almost assuredly saying that based on all the numbers and your creditworthiness, the rent would have to be $1700 for them to approve you for the loan. 

They aren't expecting you to get a new tenant for $1700. They are telling you that you are declined "as is". You can change this by putting more money down, reducing the monthly payment by getting a longer term loan, or switching the type of loan (fixed/ARM/interest only).

[V.G Jason]

They're telling you don't qualify for the loan with the current structure.

You'll need to put more money down, somehow.

[Eliott Elias]

Never heard that, a seller is not going to let you lease a property out before closing. 

[Nathan Gesner]

Quote from @Account Closed:

I agree. You don't own the property, so you can't legally sign a contract for it. You can't give the existing tenant notice to vacate, unless the Seller is willing to do it for you.

Even if everything works out, you have to rent it for $300 more than the current lease. Will the market support that?

[Rhonda McDaniel]

Quote from @Eliott Elias:

Never heard that, a seller is not going to let you lease a property out before closing. 

Right the seller could be asked to put a tenant in place on a month to month lease, in order to count the higher rate. Or you could go to a new lender (though that’s usually not allowed after a few days under contract). Talk to your sellers.  My last loan officer wouldn’t let me use short term rental projected income. He only wanted to be sure the mortgage could be paid based on regular long term rents… 

He’s protecting his bottom line.  

[Ned J.]

Yeah, something aint right.....

NO WAY can you find a tenant and sign a lease for a property you dont own... NO WAY. Not gonna happen....

Like others have said, the bank is telling you without that income, you dont qualify...well, you dont have that income until you own it....so you dont qualify with the current terms and your DTI.

[Chris Mason]

There's basically 3 possibilities here:

1) LO doesn't work with real estate investors and doesn't know what they are doing (you're on Bigger Pockets, but pick a rando to do your mortgage? Hmmm)

2) LO knows how to do it right, but miscommunicated it to OP

3) OP misunderstood LO

@Account Closed post back once it's clear which of the above it was. And if you don't mind, the first digit of their NMLS number (found in their email signature block) as well as how many digits it is (it'll be either 6 or 7 digits long). In my example you can see the 1220177 in my signature, which starts with a 1, and is 7 digits long. 

[Doug Smith]

What Chris said above. There are some programs that do require current leases to be in place, but with those programs I would not mention short-term rentals in the conversation. A lot of times those aren't allowed with those programs. Some lenders have "overlays" where the lender requires additions conditions that perhaps aren't normally required for a similar product. How much are you putting down? If you're putting 20% - 25% then you might have to go with a DSCR product. They'll do a traditional appraisal and add a FNMA 1007 to the appraisal form, which is where the appraiser provides the lender with market rents. DSCR = Market Rents from the 1007 / PITI + HOA. If that's a 1.0 or better, you're good to go. Sometimes you can do below that, but it gets really expensive. It's a more complex discussion than what we can have here, but ask your lender if they have a DSCR product that would work for you. It's a wee bit more expensive than Fannie/Freddie, but that would avoid the lease issue. I hope it goes well for you.