Borrowing someone else's credit (tell me what I need to know!)

16 Replies

Hey everyone!

My wife and I want to get into a place that we can house hack a bit on the north side of Seattle.  The challenge is that the market is hot, our income isn't huge, and duplexes are pricey.

We have a few friends with great credit and income owe us some favors.

It seems like if we can have someone cosign to borrow against their credit, we could get into a duplex where 2/3 of the mortgage would be covered by the other unit.

What do I need to know about cosigning or borrowing someone's credit?

Thanks for the help!

-Dan

How bad is your credit and your wife's?

Anyone is going to look at the risk involved.

You wouldn't be borrowing against their credit, they would be a cosigner/coapplicant and on the title/deed.

@David W. - our credit is good, just our income isn't high enough to get what we need from the bank. We only qualify for 300K and duplexes go for twice that.

@Dan Cumberland

You need to pay for anything like that.  If you want to put that level of risk on someone, you need to spell out exactly what each party gets from the deal.

It IS a business agreement.  Make it look like one.  You are increasing their debt by the entire amount of mortgage.  Banks don't look at things like that and divide.  

Who gets the house if things go south?  Who gets to decide when to sell the house?

How and when do you expect to have an exit strategy for the co-signer?

Are you going to pay the co-signer something each month?

How about seller/owner financing?  Subject to, where you essentially take over the payments for the current note holder?

Poke around here and you will see other creative financing ideas.

Thanks for the replies!

@David W.- I've heard them talk about seller financing on the Bigger Pockets podcast.  I'll keep reading to try to find out more.  I'm a newbie, so I have a lot to learn :-/

@Aaron Montague - Great points. Thank you. I'd love to know what others like me have done in these kinds of situations to make it worthwhile for the other partner. I know there's no precedent, but I'd love more thoughts and resources on that (blog posts, forum threads, etc.)

@Dan Cumberland

Think of it like a sales pitch.

How are you going to convince your friend/family/random BP member to increase their outstanding debt by $550k?

Originally posted by @Aaron Montague :

@Dan Cumberland

Think of it like a sales pitch.

How are you going to convince your friend/family/random BP member to increase their outstanding debt by $550k?

 I find with easy with friends/family who don't plan on taking this debt anyway. You can pay them a montly fees and that would be the incentive.

Great info.  Trying to house hack as well. Figuring out financing and a couple other things.  Is the duplex going to cashflow right from the start?  Will you be putting money in as a renter as well in order to offset? Do you already have reserves ready for repairs and costs once you move in?

Sometimes barriers to entry are a blessing in disguise.  Overpaying for a property is never a good idea.  Wanna lose a friend quick?  Have them co-sign.  

Not saying you shouldn't get into RE, just don't over-pay.  Think worst-case scenario.  It's 2008 all over again. Prices are falling, vacancies are up and your co-signor was just layed off by Boeing because a gov't contract was yanked.  They need paid off and your tenant neighbor stopped paying rent. You bought at an extremely high price and have no options.  What do you do @Dan Cumberland ?

I had my father co-sign on a house for myself. Two years later I am refinancing it and removing him from the loan. Would I have done this with a friend? I don't know, maybe. The deal worked out and I've made about $200k in equity. 

Can it be done? Yes

Should it be done? That is going to be up to you to determine... It can be complex and you need someone who is 100% behind you and you need to be aware of the fact you have their livelihood in your hands. 

Brandon Turner did this on a property before, people will tell you why you should or shouldn't do it but so long as you know you have to pay that mortgage before you eat it can work out. 

Great example.  Thanks @Mohit Madaan !

@John McConnell - Great questions.  We'd be putting in money as renters and we have some reserves— but that will depend on the financing that situation we land to know how much we'll have in the deal.

---

This is my first venture into real estate and it feels like a complicated way to start.  It's good to know I'm not crazy and that it is possible, but it also seems like I have my work cut out for me.  It feels like there are a lot of moving pieces to pin down at once.

With my deal I wrote a check for $80,000 for the down payment. My Dad knew I wasn't going to screw anything up that would lose me my money. 

Also, the payment was $1700 to rent a similar house would be $2000 a month. So I knew I was okay since I planned to owner occupy. It was cheaper than renting not considering my down payment. 

Do you plan to put much down? That can help convey confidence in a deal when someone knows you have a lot of skin in the game. Real estate is about being creative, taking a personal inventory and leveraging what you have to your advantage to succeed. If we all had to wait until we had cash or xyz to make a move half of us would still be stuck in the starting grid. 

Great thoughts @Steve Vaughan and @Tim Gordon

That's a sobering scenario you've lay out, Steve.  Thanks.

Listen to @Steve Vaughan he's a pretty smart guy. I'd say you really need to decide how dedicated you want to be to real estate. If you try to get a duplex in N. Seattle you are looking at an almost straight appreciation play. Your mortgage on a 600k is going to be right around 3k/mo. I heard that a quality duplex in the area can get 1700-2100/mo which means you won't have any kind of cash flow at all if you owner occupy. And will be looking to refinance out of the FHA loan in a year so you can move and put someone else into it. After a year your rents will be 3400-4200/mo - $3000 mortgage, leaves you with $400-1200/mo to pay any expenses, property tax, insurance, utilities, etc.

I'd say if you are really dedicated to becoming a real estate investor via househacking you need to suck it up for a year and get a long commute from Everett or Tacoma to find something that can/could cashflow, and won't be a keeping you up at night scenario.

@Melissa Melia may have some more insight into the duplex market there.

To answer your original question though, you said you have good credit (so lets say 700) that means that what you need isn't credit, but downpayment assistance, get a loan from a friend or family member and let them attach a lien to the property so it is secured by real estate.

Medium logo640x400Troy Fisher, Lanika Home Inspections | [email protected] | http://www.lanikahis.com

Hey @Troy Fisher !  I appreciate the input.  I want to get into real estate and I'm willing to make some sacrifices for it.  The challenge is that 1/3 of our household income is location based. My wife teaches piano out of our home.  She loves it and her students live in the neighborhood, so it's a tough spot we're in.  

Maybe I should be looking more for downpayment assistance than someone to cosign.

Originally posted by @Troy Fisher :

Listen to @Steve Vaughan he's a pretty smart guy. I'd say you really need to decide how dedicated you want to be to real estate. If you try to get a duplex in N. Seattle you are looking at an almost straight appreciation play. Your mortgage on a 600k is going to be right around 3k/mo. I heard that a quality duplex in the area can get 1700-2100/mo which means you won't have any kind of cash flow at all if you owner occupy. And will be looking to refinance out of the FHA loan in a year so you can move and put someone else into it. After a year your rents will be 3400-4200/mo - $3000 mortgage, leaves you with $400-1200/mo to pay any expenses, property tax, insurance, utilities, etc.

I'd say if you are really dedicated to becoming a real estate investor via househacking you need to suck it up for a year and get a long commute from Everett or Tacoma to find something that can/could cashflow, and won't be a keeping you up at night scenario.

@Melissa Melia may have some more insight into the duplex market there.

To answer your original question though, you said you have good credit (so lets say 700) that means that what you need isn't credit, but downpayment assistance, get a loan from a friend or family member and let them attach a lien to the property so it is secured by real estate.

Agree.  Maybe your wife can find a coworking space, or rent a room in someone else's house to continue teaching piano in the same neighborhood.  What area are you in now?

Adrian Chu, Adrian Chu & Associates | Horizon Real Estate | [email protected] | 2064075452 | WA Agent # 107768, WA Lender # MLO-920749

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