Seeking Creative Title Strategy Advice

[Nick Hulme]

Background: My wife and I live in San Jose, California, where we are renting a basement apartment from family for a great discount. Both of us have corporate jobs with decent salaries, so we are saving about half of our income every month after all fixed and variable expenses and we have no plans to move in the foreseeable future. We would like to buy property in a strong market with good appreciation potential and Utah is a place that we are very familiar with (my wife grew up there and I lived there for 6 years). Although Utah is much cheaper than the Bay Area, it isn't the bargain it used to be, so we are looking for creative ways to optimize our rate and reduce our down payment.

Plan: My sister lives in Provo, working as an ICU nurse. She graduated from college a year ago and though she does not plan to stay in Utah long term, she likes her job, she is dating someone, and she has no plans to leave within the next year. She has no interest in real estate investing and she does not want to buy a house for herself. However, she is willing to do us a favor by stepping in and co-borrowing on a loan so that she can live in it as the primary resident. We would be the cosigners with terrific credit scores and a solid DTI. We would also provide the down payment and manage the property so that my sister could simply live in it for a year and pay rent until she decides to move. At that point we would refinance and take complete ownership of the property.

Questions:

1) It is my understanding that in Utah we are allowed to split the title of the property. Ideally, we would divide it 99:1, with my wife and me as the majority owners. Am I wrong in this assumption?

2) Has anyone done something similar to this? Are there any factors we might be missing? What advice would experienced investors offer for our situation.

[Caroline Gerardo]

You want to do an owner occupied loan. Sister is only person who this will be her primary. The title cannot be 99% you with a conventional loan, that indicates this is an investment property and rates and terms are a big difference. I don't know if you can qualify as non occupant co-borrowers together, as we don't know what anyone's income or liabilities are.

I suggest you do a couple things: Write out a plan and agreement between the three of you with the date you plan to refinance and who pays for every penny. Who will pay for repairs, utilities, the payments, and what if you have an insurance claim? What if you get divorced or she gets married? Lose your jobs? Who is the one decisionmaker tie breaker... What if the value goes down? What if one of you dies? The agreement must have a specific date for this exit refinance (what if rates are 13%? you will pay higher non owner rate)... Get a yellow notepad and write it all down to talk about.

Put the title in a Living Trust but do not put the agreement in the Trust. The agreement should be done by an attorney but the Trust can be a simple two page form.

Partnering with family can cause long term emotional stress, if your agreement is written, signed, notarized you will avoid fights, as this is a business arrangement.

[Andrew Postell]

@Nick Hulme I read your post and want to clarify on a couple of things.

Saying that the title can be "split" isn't really that accurate.  If you are purchasing the property within a partnership...then the partnership defines what % of ownership the partners have.  But the title of that property would entirely be in the name of the partnership.

Same if you put everyone's individual names on title - it's not split.  Just everyone has an ownership interest in the property.  

I would also say that this is the same if people are co-signing on a loan.  The payments are not split.  Everyone is responsible for 100% of the mortgage payment - and yes, that's if there are co-signors.  The payment will be represented on your (and their) credit with a 100% payment.  The only way to remove someone from a mortgage is to refinance them off.  You can remove people from title pretty easily...but refinance would mean that you would need to qualify without that person.  Otherwise, that mortgage is on their credit until it is removed.

You can certainly be co-signors on someone's real estate when they buy it for themselves...but this almost sounds like the opposite of what your sister wanted?  If she's good with it, you can do it.  Just know that your lender needs to be ok with things.  So, if you do use a living trust...some lenders may not like that.  Just get prequalified with someone first and talk through these things some.  Be aware that the mortgage will be in the sister's name until it is refinanced out.

Hope all of that makes sense.

[Taylor Woodbury]

Hey Nick, I've helped buyers do exactly this before. It really does come down to having a clear written agreement between all parties so everyone knows what to expect. As far as the loan goes, I can recommend a few lenders who shouldn't have a problem with it assuming income and credit all check out. 

[Nick Hulme]

I appreciate the quick replies. A couple follow-up questions:

1. What all needs to be accounted for in the agreement? Sister's rent amount,
term (date of refinance), mortgage payment responsibility, insurance responsibility, utilities responsibility, tenant selection responsibility (since this will be a multifamily property), property management responsibilities including repairs, maintenance...

2. When the property is refinanced a year later, after it has been owner occupied for the required amount of time, will the rate then increase to that of an investment property?

[Michael Smythe]

@Nick Hulme you should try to approach this from a "worse-case scenario".

What happens if either the sister dies or you & your wife?

If it's not in writing in can get very messy with heirs and such.

[Taylor Woodbury]

Quote from @Nick Hulme:
I appreciate the quick replies. A couple follow-up questions:

1. What all needs to be accounted for in the agreement? Sister's rent amount,
term (date of refinance), mortgage payment responsibility, insurance responsibility, utilities responsibility, tenant selection responsibility (since this will be a multifamily property), property management responsibilities including repairs, maintenance...

2. When the property is refinanced a year later, after it has been owner occupied for the required amount of time, will the rate then increase to that of an investment property?

 You might want to touch on ownership in that agreement as well, that will be important. With the refinance, unless one of the cosigners of the loan is living at the property as their primary residence at the time of the refinance, it would be considered an investment loan. You don't have to refinance though as long as your sister was ok continuing to be on the loan. Granted, rates are headed down so it would likely be beneficial to refinance in the next 1-2 years. 

[William Hochstedler]

Like much of what @Caroline Gerardo and @Andrew Postell said, your options are going to be dictated by loan terms (how title is held and by whom).

So find a local lender in the market where you intend to buy and be open with the lender.  They will tell you what you can and can't do to.

Certainly talk to a lender before exploring any entities or trusts as you will usually have to hold title in your name for financing.

Once you understand what your borrowing options are, you can think about arrangements with your sister.  Keep in mind that a binding arrangement may be prohibited.  But there are ways to approach this once you come up with a financing plan.

So keep us posted on what you find out!

[Caroline Gerardo]

to your #2 Sister will want you to refinance and payoff the loan as it sticks on her credit report forever. She may not want handcuffs to your future plans. She might not qualify for another loan, unknown it depends on if she can show it as positive rental income but with your plan it sounds like she won't have tax returns in the future to make this work. You mention she is only to be one percent beneficiary, she provides 99.9% of credit risk and income as long as the mortgage is in her name joint with you. It would not be fair to make her continue. MAYBE rates will go down and you could refinance into a non owner loan with similar terms but today a non owner occupied loan has more fees and higher rate. It is hard to predict what the future will provide. Prepare in your agreement worst case and best case. 

All conventional loans, USDA and VA allow Revocable Living Trusts for vesting but not other entities at closing. @William Hochstedler

[Vince Craig]

Everyone has given great Advise. At the end of the day a title company/RE Attorney could help sort this out for you. As for the loan, It would be nice if you found a property that would sell on terms...  I'm an Realtor in Utah and and specialize in Seller Financing, I'm happy to help.