Buying RE with a partner using conventional loans

5 Replies

Hi guys,

I ran out of conventional loan slots. But, I have formed a partnership with someone who still has 9 left (he owns his personal residence). How do we buy property with his loan and my money? 

I know that some people will say to make an LLC. We already have one, but the problem is purchasing the property.

From my experience with conventional loans, the money for the down payment has to come from the person taking out the loan. It cannot be a gift. Is the only way to put the money in a joint account? Can I put the money in our LLC business checking account and use that? Or, will the conventional lender not allow it.

This is one of the things you hear people do all the time, but no one shares the details. How do you do this?

Thanks,

Daniel

My understanding is they grant conventional loans to individuals, not to LLC's. People often use LLC for liability protection, and after closing the property in their names, transfer it to an LLC, which is a little sneaky. No one shares details because they don't want to blab about how proud and sneaky they are.

How many conventional loans you can get changes over time. I was at the limit at one point, both from the standpoint of slots and DTI. We decided to partner with our mom in law real estate investing because she was retired, had plenty of cash, collected on her husband's life insurance, and frugal all her life. We on the other hand, had high W2 incomes, but to make some deals, especially in NYC, you got to show can put a lot down, even to the buyers, not only the banks.

The problem came several years later, when we tried to refi to get better interest rates, cash out somewhat and maybe buy even more properties. We had a strange experience where we applied to refi 2 mortgages, one was approved, one not. Turned out the one approved we owned 100%, the one they had the problem with we own 50%.

Spoke with the bank, it was a DTI issue. For the one they had trouble approving, they take into consideration all of her mortgages, and the problem there was she partnered with others in a few other properties, and also, she's retired, and no W2 income. But we explained she owned those properties with her son, he is a doctor, so maybe his income should be taken into consideration. What's the problem with this? Turns out her son, the doctor, partnered with her, but partnered with others, and if you do a DTI, you have to consider our income, her income, her son's income, her son's partner's income, and as those he partnered with are also doctors, even more partners.

Before the story gets more complicated, I had a wealth account with my bank, chatted with my advisor, about this. He ask us why we didn't go thru his bank, and it would be simpler because of the business relations. So I gave him the go ahead to speak with his mortgage department. Their answer was it's a go, because they'll only consider our DTI, not the way he other bank did it. The banker said her name would be on the mortgage, and that's it. My wind up plunking down two mortgage application fees.

When we were ready to resume our acquisitions, it was in the middle of a real estate crash. And for this, we had to thank the mortgage approval hangups. Good timing. We bought foreclosures, and the usually the foreclosing bank provided the mortgages. It turned out to be simpler because it's usually a portfolio loan. They don't consider the number of properties, DTI or whether you live there or not. Lots simpler. The only hangup here was they want to see the down payment is made with seasoned cash. not a check from my HELOC.

Does your partner have an investment or 401k account they can show to demonstrate funds? When my wife & I applied individually for investment property mortgages they wouldn’t let her use funds in an account that had been paid out to me alone. So she just provided a 401k statement to satisfy the underwriter.

Originally posted by @Dennis W. :

Does your partner have an investment or 401k account they can show to demonstrate funds? When my wife & I applied individually for investment property mortgages they wouldn’t let her use funds in an account that had been paid out to me alone. So she just provided a 401k statement to satisfy the underwriter.

 In our case, my wife helped her mom manage the finances for a number of years, like over 20, account is jointly held, and the account balances ranged from $50K to over $100K. All they want to see if you have an account over 6 months old, preferably a year, with your name on it, and it should be OK.

Alternatively, some guy I worked with is a very good friend of another co-worker who had a bit a money in the bank. They took one of those accounts, added my friends name onto it, wait over six months, so if he needs to do anything, show the bank to passbook, and he's good to go. It's just for show, as far as these guys are concerned, the money belongs to the rich co-worker

So it all depends on your personal situation.

It's funny that the bank made all this fuss during the qualifying stage, but at the closing, they don't check or care to see where the funds came from. They say you can't use the HELOC to qualify, yet you can bring the HELOC checkbook to the closing to make payments.

Thanks for the comments. 

Maybe my first post wasn't clear, I am NOT trying to use a conventional loan with an LLC. The reason I mentioned the LLC is that I know we could do this in that structure using unconventional financing. But, we will get the best rates using a conventional loan.

My partner does have enough money in his investment accounts to cover the down payment, but what I'm worried about is when he actually wires the funds at the closing table. He doesn't want to use his 401K or IRA, he wants me to pay the downpayment. I don't think that's possible, right?

It seems like the only way to do it is for us to have a joint account or I have to give him the money and it has to season in his account for a number of months. Hopefully, when we close and he adds me to the title the money won't be considered a gift and subject to taxes.

Is this right or has somebody done it differently?

Originally posted by @Daniel Mills :

Thanks for the comments. 

Maybe my first post wasn't clear, I am NOT trying to use a conventional loan with an LLC. The reason I mentioned the LLC is that I know we could do this in that structure using unconventional financing. But, we will get the best rates using a conventional loan.

My partner does have enough money in his investment accounts to cover the down payment, but what I'm worried about is when he actually wires the funds at the closing table. He doesn't want to use his 401K or IRA, he wants me to pay the downpayment. I don't think that's possible, right?

It seems like the only way to do it is for us to have a joint account or I have to give him the money and it has to season in his account for a number of months. Hopefully, when we close and he adds me to the title the money won't be considered a gift and subject to taxes.

Is this right or has somebody done it differently?

After their process the loan they don't go to the closing and check to see where the money actually came from. They told me nothing can from the HELOC for the down payment when processing the loan. So we showed them my mother in law's bank account where my wife was a joint holder. They are OK with it. I paid a $6,000 deposit already and had to bring another $14,000 to the closing by bank cashier's check. Guess what? I bought the bank cashier's check with money from the HELOC.

All they want to see at the closing is a bank cashier's check, so it doesn't matter if you covered it, if he covered it, or if your grandma covered it. Whatever you do at this point is between you and your partner. No problem on what you plan to do.

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