Month-to-Month (MTM) Leases: Eligibility and Increased Reserve Requirements

Rule

Lendency primarily requires a fully executed, active 12-month lease agreement signed by all parties to qualify for standard DSCR terms. While Month-to-Month (MTM) leases are permitted, they are treated as an exception and trigger an increased reserve requirement of 9 months of the subject property’s PITIA (Principal, Interest, Taxes, Insurance, and Association dues), compared to the standard 6 months for long-term leases. To be eligible, an MTM arrangement must have originated from a 12-month lease that explicitly states the term reverts to month-to-month upon expiration.

Lendency Insight

From an underwriting perspective, the lease is the "guarantee" of the property's income. A 12-month lease provides a predictable horizon of cash flow. An MTM lease, while providing the landlord with flexibility to adjust rents or terminate occupancy, introduces a "liquidity gap" risk. If a tenant can leave with 30 days' notice, the lender needs to see that you have a deeper cash cushion—9 months of payments—to carry the property through a potential vacancy. Furthermore, we verify the "staying power" of MTM tenants by looking at recent payment history rather than just the old contract. This ensures the property is truly stabilized and not just "occupied" on paper.

Common Scenarios & FAQs

  • My 12-month lease expired over a year ago. Can I still use it? Yes, but only if the original agreement specifically indicates that the term becomes month-to-month after expiration. In this case, you must provide proof of the two (2) most recent rent payments received (e.g., cancelled checks or bank statements). Please note that rent receipts alone are not acceptable documentation.

  • What if my expired lease doesn't mention a Month-to-Month term? If the lease has expired and does not explicitly state it reverts to a month-to-month status, you must provide a new, fully executed 12-month lease agreement to proceed with the loan.

  • Can I lease the property to my own business? No. All leases must be "third-party" leases. This means the tenant must be an independent entity or individual with no legal or financial connection to the borrower (an "arm's length" transaction).

  • Do you allow "Corporate Leases"? Leases with corporate tenants are considered on an exception basis only. You will need to provide a Letter of Explanation (LOE) and confirmation of exactly who will be residing in the property during the lease term.

  • Does the 9-month reserve rule apply to purchases? Purchase transactions may be vacant at closing, meaning no lease is required. In these cases, we use the appraiser's market rent estimate to calculate the DSCR, and standard reserve requirements apply. The 9-month MTM rule specifically targets properties where an MTM tenant is currently in place.

  • Are there restrictions on who the tenant can be? Every leased unit must be used for residential purposes only and must be leased to a single family (per unit). Commercial usage or sub-leasing arrangements are generally ineligible for this program.

Key Definitions

  • PITIA: The sum of the monthly Principal, Interest, Taxes, Hazard Insurance, and any Homeowners Association dues; this is the base figure used to calculate your required reserves.

  • Third-Party Lease: A rental agreement between a landlord and a tenant who are not related by blood, marriage, or business ownership.

  • Verification of Rent (VOR): The process of using bank-verified data (cancelled checks or statements) to prove that a tenant is consistently paying the amount stated in the lease.

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