Fannie Loan Guidelines: Refinancing non-arms length, seller carry
Hi BP community!
I'm having a hell of a time trying to find guidance on conforming guidelines for a particular refinance I want to do and am hoping someone has some advice..
I'm buying a duplex from my mom that she owns free and clear. I will be careful to make it as much of a normal sale as possible. I'm buying it for the actual value (about 500k) and putting down 25% in cash that can be sourced as being my money. The rest will be seller financing with a normal rate and term. I want to get her the rest of her cash by refinancing shortly after (we do not want to sell the note for various nuanced reasons). In this scenario, there is no cash-out aspect, just a refinancing of an existing first loan. The complexity is that the note holder is my mom, it's a duplex and will be used as an investment property by me, with her leasing one of the 2 units for a few months until she moves into her free-and-clear cabin. Any advice on conforming guidelines would be greatly appreciated! Thank you!
Also, she is not financable, so creative solutions involving her being a part of the lending process are not options unfortunately.
I guess I'm not understanding why you aren't just doing a purchase? You have the 25% down that is required? The fact that she will be renting one of the units doesn't have to be a consideration. The appraiser will show what market rents per unit will be and the other unit should have a lease in place.
I think by treating it as a owner financed transaction to get on title, then doing a refinance just makes things a bit more complicated than it needs to be?
@Kevin Romines I should have included an additional detail... She doesn't want the 1099 from proceeds of the sale. She hasn't paid taxes for 25 years. We're in the process of taking care of it and don't want to bring attention to her from the IRS until the past returns are ready to file, which will be a year or so. I don't want to wait that long.
In WA state where I'm at, there is an exemption if a person is adding a relative or another person to title to assist in a refinance of the property where the original owner of the property will also be on the loan. If a person is quit claimed to title other than that, it is considered a transfer of title in a percentage based on who all stays on title. If its a transfer of title of any kind, it is reported to the DOR Dept. of Revenue for that state, and in WA the seller pays Excise tax. for the sale.
I assume that info. is also reported to the IRS. If that is the casein your state, then how would you avoid the IRS knowing about the sale. It sounds to me like she just needs to get current on her her taxes for the last 4-7 years depending on if she will be getting a refund? Then, once that is settle, go ahead and just do a normal sale and report it correctly, pay the taxes associated and move on down the road with the tax issues behind her? Consult with a CPA regarding the number of years back taxes to file, but I believe its 4 if you are getting refunds and as much as 7 otherwise.
@Kevin Romines thanks for the advice, very helpful. Do you know if buying it seller financed and refinancing right away would be a problem if we’re wanting to take that route?
Hey Nathan
So let me get this straight. You want to buy with 25% down and using owner financing. Mom will come off title as the owner and then be a lien holder, by placing a lien on the property for the remaining amount owed to her? If that is correct, then a no cash out refinance can be done within minutes of getting on title. The lien on title for the remainder owed to your mom will be what is paid off with the refinance + closing costs. The max. LTV on this as a SFR will be 75%.
I would talk to your lender and describe the situation as this could fall in to an Non-Arms Length Transaction. Have the LO get this scenario approved by underwriting even before you go on to title. That way you will know any issues that could come up before you proceed? If you are going to refinance with your own company (another LO will need to do the loan for you) You could just ask your own underwriting staff if this would be an issue. Once you have that info. you will know if you can proceed in this manner or if issues will arise?
Be prepared to put together a PSA for the purchase. Then execute the purchase and report the sale to your state DOR or Dept. of Revenue. Record a land contract with the county. Even if your contract doesn't have any monthly payments, but just a balloon payment, follow what the contract says.
I closed a loan a year ago that had no monthly payments, just a balloon payment. We had to vet that out with the original contract showing no payments required, just a balloon. It was accepted by underwriting and we completed the refinance.
I believe you can do this in this way, just run it up the flag pole prior to doing anything so you know if there are any hurdles for you to get around prior to executing any documents.
I hope this helps?
@Kevin Romines Yes, very helpful! Sounds like hurdle here is how the non arms-length thing will be looked at. Thanks again
DSR= Net operating income / debt service.
So you take the lease amount - expenses ( Some lenders require a management expense.) Then divide that number into the PITI or basically the net income must exceed the debt service by 120%
The problem may be that you do not have enough income from the one lease you have to cover it. Therefore once your Mother moves out, and you have a new tenant with a signed lease.
Also be aware the lender will have the appraiser to a "rental survey" to be sure the rental rate is a market rate. So an inflated rental agreement will probably not work.
Do a title search, make sure there are no tax liens on it. The IRS will sometimes sneak one on there if the taxes have not been filed for while.
With this being residential, it wont require a DSCR like a commercial loan would. They will just take the existing leases, and on the unit mom lives in, either get a lease signed with mom, or the appraiser will detail what market rents are. The lease always takes precedence over the market rents, so you control the number better with a lease.
So whatever the rents are X 75% minus the PITI mortgage payment. If a gain, that gets added to the income, if its a loss, that amount gets added to liabilities. It offsets the full amount of the mortgage payment and typically doesn't move the needle much on his debt ratio. So if your debt ratio is good now, at 50% of your gross income or less, then you should still be good once all the number are crunched.