Selling on contract, but bank wants lease for refi, help!

House was shorted with private money and rehabbed. We finally found a buyer on a Contract for Deed/CD (land contract), so far so good. But to pay off our high interest (15%) private lender, we’re refi’ing the house right now too. The bank needs to see a lease proving income from the property, and wouldn’t be happy if they know we’ve arranged its sale on terms, which would mean their loan will be paid off in a year or two.

Since it looks like we’ll close with our CD buyer before the refi funds, I’m thinking of getting a “fake” lease signed by our buyer to show the bank. We’ll also have the CD that will show the “real” deal, obviously, we won’t show that to the bank. We’ll also have a separate document that states the CD is what really controls the transaction. Does this make sense, or is there a better option? Or am I too worried about what the bank will think of the sale of our “rental” property?

The Contract for Deed is a sale, you’d think the Bank would rather see this instead of a Lease. Maybe seasoning is an issue. Maybe get another Bank. Herbster

My concern is that the bank may cancel the refi if they see the CD and know their loan will be cashed out within the next year or two, costing them more admin. expenses than a typical loan that is on their books that yields interest payments to them for years.

Maybe the problem is that you don’t have enough income to qualify for the refinance unless you use rental income generated by the property. Did you ask the lender what would happen to your loan application if you don’t have a lease on the property?

Don’t “fake” anything. That is loan fraud. Severe fines and jail time if you are convicted, and, your loan will be called due anyway.

If you are able to refinance, how many months will it take you to recover your refinance costs – both closing costs and financing fees – with your lower monthly payments? If the answer is two years or more, then maybe you should not bother with a refinance.

That’s the problem, the lender wants to see income from the property to support the loan payments. Our private loan is at 15%, so 4 months interest pretty much covers the refi costs. How concerned are banks anyway about whether we have a CD (long term buyer, 2 year balloon) or a renter providing the cash flow to make the payments? If we tell them about the CD sale–hardly a done deal, esp. for a low-down buyer–would they cancel the deal? Since lots of banks sell their paper anyway do they get enough $$ for the upfront fees that they wouldn’t really care?

I am guessing that you went with a private, hard money lender because you could not get institutional financing. If your income and your credit scores have not significantly improved since then, I would not hold out much hope for getting a new loan from an institutional lender.

You support the loan you have with your current lender by charging your buyer the same interest rate on the amount he is “financing” on your contract for deed. Perhaps with the high interest rate, your buyer will have some incentive to refinance at which time you (and your loan) get paid off.

Actually, my scores are mid 700s, but we went hard $ for expediency, the rehab took too long, market sunk, and here we are, nearly a year later. Something’s gotta give. We’re trying to make the deal work and may have to go as low as 6% on CD to do it. But the payments will still support the loan, and we’ll get our profits out at refi time. Or that’s the plan.

you definatly dont want to fake anything ever but, I imagine everything it being watched extra close right now. it might be best to just let the bank know what is going on?

I think you shouldn’t be too concerned that you’re going into a potentially short term loan and the bank knows about this. Worst case for the bank. You cash out in 2 years and they get their money back. There’s a 2/3 possibilty that the tenant will want to extend the lease anyway. Besides, banks are aware of this kind of business which is why they make you pay the interest first. In 2 years you’ll be paying like 90% of your payments as interest, virtually no equity. And you can show that you’ll have enough income to cover their payments and then some for at least 2 years, and possibly longer if the lease turns over. If you explain this to the bank I can’t see why they’ll give you a hard time. If not, get a broker and find another bank that will.