Strange Real Estate Transaction - Need HELP?

Question

I asked this question a few days ago but not sure I put in all the pertinent details so here we go again:

I own a house with a business partner. The mortgage and deed are only in my name and we have a separate agreement spelling out the partnership and rights. I need out of the mortgage and he will willing to take me out. I am giving up my equity in the property to achieve this result.

Option 1 - He could purchase the property from me for the current loan amount but he doesn't want to come out of pocket another 20% to do this. The only way around it is to take a loan based on the market value then return the equity to him after close. This will certainly appear to be fraud even though that is not the intent so I am leaning away from it.

Option 2 - Add his name to title via quit claim and have him refinance me off the mortgage. He has been an owner from day one just not on title.

Is option 2 legal?

Any other options you guys can think of?

Answer 1

Option two is legal. However, the mortgage company may require that he be on title for at least 6-12 months before letting him refinance.

Answer 2

The easiest way would be to do what is called a "gift of equity" given that you have equity in the property. You sell him the house and "gift" 20% of the equity which turns into his down payment. His new loan is at 80LTV. The rules vary for this from bank to bank. Most banks require both parties to be "family members" in order to gift equity. However, since he's not on the loan or title there is nothing linking him to the property. Just write a letter of explanation saying he is your uncle and it should fly.

As far as option 2, that probably won't fly with most lenders. We require you to be on title at least 90days before you can refi the property. Putting someone on the title for "one day" and trying to refi into their name will raise red flags. This is a "straw buyer" situation. That means you are using someone elses credit who has no "vested interest" in the property. Can you link your partner to the property somehow (other than your contract)? How is the mortgage paid? By personal or company check? If you can show that payments (cancelled checks with his name on it) are paying the mortgage you can establish "vested interest". If you make the payment each month out of your account and try to show bank statements that he's "giving you money" each month that won't work. Has to be cancelled checks (6 to 12 months worth) with his name or your company name with him on the account. Otherwise, the bank thinks you are just using someone with better credit than you to obtain more favorable terms.

Answer 3

I don't think option 1 would appear to be fraud. You have a written agreement showing his equity stake in the property, so he has a clear source of funds. When he identifies the source of funds for the down payment, he'll list real estate investment or something like that, and can show the documentation that he was entitled to that money.

I would shop this around to some lenders and see if they will just allow him to apply his equity to the purchase. I would imagine some of them will allow it without the hassle of getting the second mortgage etc.

Good luck.

Answer 4

um, greg, ... sry to upset your apple cart here

I'll bet that our questioner never had 20% in the house. In fact, in today's market, the house may be upside down with the amount owed greater than the current sale value.


if so, partner isn't going to be able to refi the property into his name only because he can't get an appraisal to support the loan amount.

which makes the whole thing sound to me as though you're going to have to talk to the existing mortgage company about substituting partner's credit for your credit.

that they might not want to volunteer to do this isn't the point ... the point you talk with them about is what happens if we can't do anything here -- foreclosure and loss to them because the property is upside down. To avoid this, i/we ask if you'd be willing to .....


GL

Answer 5

depending on where you live, ck state rules for selling & transfers..forms & info are available through each state treasury dept. if you don't find what you need there, ask free advice from free lawyer questions. they are listed on web.