Rental Property Investor · Tampa, FL · Member since 2020 · 10 posts · 3 votes
Hello all,
I have come across a situation that hopefully you may be able to help. I am in the process of closing on a property but unfortunately my personal credit was hit and now in order for the closing to happen I would have to have a co-signer on the loan and line of credit.
Thankfully, I was able to find a co-signer that was approved for the line of credit but then I was faced with another issue. Since I have a entity, in order for the the co-signer to eligible for the loan I will have to add them to my entity. I am super excited to lose on the property but i am worried how this will effect the co-signer and my entity. Also, how should I go about adding the co-signer to my entity, is it a particular percent that they have to own in order to be approved? Will I be able to elimante the co-signer off my entity once i refinance the loan since my credit will back up to the recommendations?
Bankers sometimes tell you things that don’t seem to make sense. I was a banker for 25 years, much of that time consisted of my working on commercial loans, and I can tell you that there usually is a reason that bankers do what they do. Another thing that I can tell you is that underwriting guidelines will sometimes vary from institution to institution.
In this instance, you’re trying to remedy weaker credit by adding another person to the business loan. Technically, the entity will be the borrower and both you and the other person will be “guarantors” as opposed to the other person being a co-signer. The borrower will be primarily responsible for the loan payments, but if the borrower doesn’t pay, the bank will come after the guarantors to pay the loan.
Whether or not the other party will need to be added to the loan is not universal. It will depend upon the lender and what they require. The best thing to do is to ask the lender what they require. If you have already entered into a contract to purchase the property that will be collateral for the loan, the lender will likely require that the borrower be the same entity that is listed on the contract. If you choose to simply create a separate entity to own the property with the other guarantor as another owner, you will likely need to reach out to the seller, explain that you wish to purchase the property in a new entity (something that is pretty normal), and have an addendum prepared to switch out the purchasers.
The person to ask about your particular question, however, is your lender. Simply ask them how they would prefer to see the transaction structured and that should guide you toward your next steps. Good Luck!
@Jaysen Medhurst Thank you for the response. I will keep you informed on how it goes. Also, what do you prefer for the percentage on the new entity, 50-50, 90-10?
I think it depends on what everyone is bringing to the table, @Brandon Green. Are you doing all the work, bringing the cash, and the co-signer is just there to make the bank comfortable? If so, 10-25% for him is probably appropriate. He is taking a risk and deserves to be compensated for that. If he's also putting up all the cash, then 50-50 or even 60-40 in his favor is appropriate.
Bankers sometimes tell you things that don’t seem to make sense. I was a banker for 25 years, much of that time consisted of my working on commercial loans, and I can tell you that there usually is a reason that bankers do what they do. Another thing that I can tell you is that underwriting guidelines will sometimes vary from institution to institution.
In this instance, you’re trying to remedy weaker credit by adding another person to the business loan. Technically, the entity will be the borrower and both you and the other person will be “guarantors” as opposed to the other person being a co-signer. The borrower will be primarily responsible for the loan payments, but if the borrower doesn’t pay, the bank will come after the guarantors to pay the loan.
Whether or not the other party will need to be added to the loan is not universal. It will depend upon the lender and what they require. The best thing to do is to ask the lender what they require. If you have already entered into a contract to purchase the property that will be collateral for the loan, the lender will likely require that the borrower be the same entity that is listed on the contract. If you choose to simply create a separate entity to own the property with the other guarantor as another owner, you will likely need to reach out to the seller, explain that you wish to purchase the property in a new entity (something that is pretty normal), and have an addendum prepared to switch out the purchasers.
The person to ask about your particular question, however, is your lender. Simply ask them how they would prefer to see the transaction structured and that should guide you toward your next steps. Good Luck!