Will having parent cosign keep my credit free for more deals?

Question

Me: great W-2 income, excellent credit, practically 0 debt, plenty of savings, west coast.

Mom: fixed income, retired, renter, worried about rent increasing, east coast.

While looking for my first RE investment, my mom presented this problem. (We are problem solvers here amiright?) So now I'm looking for a small multifamily for her to house hack. I'll be paying the down payment and she will be paying some of the mortgage which would significantly lower and stabilize her monthly housing cost.

Question 1: Will her cosigning on the mortgage look better on paper to future lenders for my future real estate investments? It will be her primary residence after all. Now that I think about it, I think she will need to cosign so I get the best mortgage rate because of that.

Question 2: Is it a better option for my future deals to just gift her the down payment and have her do the mortgage herself?

Question 3: If the mortgage is in my name, what is my best type of loan. I can pay 20% or more down, but I'd like to keep my capital free for future deals. What are the ballpark trade-offs based on current rates if I put less down? I'm eligible for a VA loan, but I don't think the property is eligible because of occupancy rules. I love my mom but I'm not moving in.

Zack Karp · Answer

@Derek Bugg

Short answers to your questions:  1 no worse, 2 yes, 3 see below.If you use the VA loan, you have to occupy, and would need 12.5% down payment if you co-sign with her and she's not a Veteran.   Sounds like that is off the table as you don't want to move to the east coast to live with Mom.

Here's your options:

1. Mom buys as a primary residence.  You don't co-sign, because the rental income from the other units will be used to qualify and offset the mortgage payment.  She can put as little as 3.5% down FHA, or 5% down using Conventional Home Possible, both of which can be gifted by you.  You are not on the deal, no affecting future deals for you.

2. Mom buys as a primary residence, you co-sign.  FHA is off the table because with a co-signer on a 2-4 unit you need 25% down.  You're better off just using Conventional financing, 15% down for a 2-unit and 20% down for a 3-4 unit.  In this case yes the debt would work against you on future deals.

3. You buy as an investment property.  Rent to Mom and the other tenants.  Requires 25% down for a 2-4 unit.  You claim the property on your tax return as a rental property, and there is minimal impact to future deals if you are claiming all the rental income and deducting expenses.

There might be other options too that don't involve Conventional financing, but these are your options with the best terms available.  You need to get with a rockstar loan officer and map it all out.

TYFYS and best of luck!

Jason Wray · Answer

Derek,

VA loans can be used to finance up to a 4 unit property with no money down.  Having your mother co-sign does not benefit you in regard to buying another home down the road.  That mortgage will still be on your credit and the liability will can only be excluded if you are the co-signer not living in the home.  You could always just have your mother buy an investment property after you close on the 4-unit.  The funds would be better off deposited into her account 3-4 months prior to purchasing the investment to create 2-months or more of seasoning since the UW generally asks for (2) months BK statements.

Using the VA certificate of Eligibility or you DD-214 allows you to house hack and get into the house with no money down 100%.  Lenders do not look at the fact a person had or has a co-signer they just look at the debt ratios for you or the both of you to make sure one qualifies with the slight margin of help to approve.  They are not going to look back at an old loan to examine benefit of a co-signer.

Your best bet would be to use the CE to buy your VA home.  You can always qualify for an investment after you close since your W2 income is decent.

Derek B. · Answer

Thank you @Jason Wray and @Zack Karp. I really appreciate your input.

If we move quickly, and decide to keep me off the mortgage, I will definitely have to gift her the down payment. If the gift is done at the same time she applies for a loan, I'm assuming there's just some paperwork I sign saying I do not expect the gift repaid?

Also, I feel some calculations coming. I would need to gift her enough to keep her payment low. A higher down payment also means she doesn't pay PMI and she would get a better rate.

How much downside is there for my future deals if I'm not on this mortgage. In other words, if we decide to do an investment mortgage in my name only, would a successful multi-family with a little cash flow look better to lenders for future deals? If so, is this trade-off worth tying up the down payment and a little higher rate? FWIW, the town is not in a growth area. Appreciation = inflation basically.