Now that I’m putting the final touches on securing a loan on Rental Property #2, I feel like I have a better grasp on what to expect from the lender in regards to closing a deal. That is, I now know what documents I need to prepare, and the steps to take to insure that all requirements are met within 30 days (typical closing time). In fact, I think I have the process figured out enough to where I can close within 20 days. Many days are lost when you have to go back and forth between different parties, but this can be avoided altogether if you know what to expect in advance.
Here is a summary of documents, information needed once you enter contract:
- W-2 forms for up to two years (this step can be bypassed if you secure a pre-approval letter within a few months of closing. In my case, I needed to verify this information again, since my pre-approval letter was granted about eight months ago, before I bought Rental Property #1.)
- Most recent paychecks, up to two weeks (you can send them the two most recent paystubs, and they’ll probably require a final paystub just prior to closing. Typically, three total.)
- Bank statements for up to two months (most recent statements in your checking account.)
- Stock statements for up to two months (this is needed if you still need to transfer funds from a brokerage account to a checking account.)
- Appraisal (depending on your lender, the appraisal document can take 2-3 days to complete, or up to a week. It’s best to order this document ASAP. For owner occupied, I paid ~ $350. For a rental property, I paid ~ $700.)
- Property Tax payment (if you own other rental units, the bank will need you to verify that you are up to date on your property tax payments.)
- HOA documents + Questionnaire (This can take up to a week to process. It’s also best to order this ASAP from your HOA, provided your new property has an HOA.)
- Master Insurance Certificate (Contact the HOA office. They should be able to direct you to the contact person to get this information. I forwarded the contact information to the lender and let them take care of this.)
- Effective HO-6 Policy (for owner occupied, I was able to just provide the lender a quote. I didn’t finalize the insurance policy until closing. For a rental, they demanded that I have an effective policy before closing. I didn’t know this in advance, so I wasted a few days on this item. The processing of my loan was stalled until this hurdle was finally cleared. I would clear the home inspection and appraisal items first, before purchasing the insurance policy. The home inspection and appraisal usually allow you your last chances to back out of the deal. So, make certain you are 100% committed to buying the property, before purchasing insurance.)
- Don’t move funds around (If you need to move large amounts of money around, try and do so a few months before you decide on bidding for a property. Once in contract, underwriting will scrutinize every last detail of your checking account. I transferred about $100 from a brokerage account to my savings, and they wanted a brokerage statement to confirm this transaction. Just to make sure it wasn’t from an unscrupulous source. The less transfers you need to initiate, the better.)
- On the topic of moving funds around, also note that if you are buying a property as “rental” and not “owner occupied”, you won’t be able to transfer in funds that are designated as “gifts”. For a “rental”, the lender will typically require all funds coming in to be sourced by YOU! Cash is not accepted towards the downpayment either, because the source cannot be verified. My first rental was designated “owner occupied”, so I was able to wire in some cash, without objection. For the second property, it was a “rental”, so that’s the main reason I had to liquidate most of my stock portfolio…
These are the main items my lender asked for. Of course, your experience may be slightly different, depending on which lender you go with. Good luck, and happy hunting!