I have a good income and FICO score (over 700) and I am considering co-mortgaging with others who find a good deal, but don’t have great credit.
I would take a fee if there is plenty of cash in the deal, or I could take a share of the equity in the property. I am thinking that with my good credit we could qualify for much better loan terms than they could without me (lower downpayment, better interest rate, lower points, ???)
Here is my problem: How do I protect myself in case my partner doesn’t keep up the payments? What are my options legally? Could I have a 2nd mortgage for my equity? whould I be able to foreclose to protect myself if they default on the 1st? Or, could I have them sign a lease that would become active only if they default on the 1st. That way they would become my tenant and I could evict them if necessary. Or, if there wasn’t much equity could I just walk away from the deal? Could I give a deed-in-lieu of foreclosure to terminate my liability, or would I still be on the hook for the 1st mortgage? Would giving a deed-in-lieu ruin my credit?
I know there are a lot of questions I’m asking, but I need to get some good information. I have asked a few real estate ‘experts’ and they are looking at me like I’m crazy…
By the way, I was originally looking to co-mortgage with buyers who would owner-occupy. I guess I could also work with investors who are buying units to rent. Would I need to do anything different legally?
And yes, I plan to work with a good real-estate attorney to prepare and close any deal I get involved with. I’m just trying to figure out some strategies ahead of time.
I think the investors look at you like you are crazy because they think that you might be… If you consent to use your credit to get someone a lower payment because their credit is bad, you will tie up your credit without realizing the gains. How are you going to get paid for your investment? Also, why do you think the other peoples credit is bad. I would expect that they will end up ruining your credit as well as their own. Also, if you try to foreclose on them for not living up to their obligations in this partnership, they will claim an “equitable interest” in the property and you will have to pay them for that interest to get rid of them.
I not only would not do anything of this sort, I would run from it as fast as possible.
I believe deals like this can work. I am trying to put together several at this moment. If they work they can and do work well. If your partner gets in trouble it can and they do crash. Your best bet is to stay on top of things all the time. Make sure the payments are being made on time. Get passwords etc to the mortgage accounts and check on line to see the loan status. Better yet get access to the checkbook and even pay the payments yourself or check to see they are made and do not bounce.
Yes deeding a property back to a bank can hurt your credit. On loan applications one if the questions is have you ever deeded a property to a bank in lue of foreclosure. You too will show late payments to that bank.
My advice is to be carefull if you decide to do these kinds of deals. Do them with someone you trust or can get references on. I too am trying to put together similar deals and just got out of BK. I have several clients and partners and friends who trust me but I am sure they watch me just the same. I have nothing to hide and will give them access to anything they ask. Your partners should do the same or you should seek other partners.
Wilson’s idea about lease etc is good point. I actually like the idea of a second mortggae and foreclosure instead of a lease. I too would prefer to do rental property instead of a homestead deal. It is easier to lift stay in BK court on rental property than a guys homestead. I have been on bothe ends of both and it is all bad news. Think about you making the payments to avoid your credit getting hurt and him livimg there free for a year or two. This will eat up any equity for sure. This is the worse case scenerio and may not happen but it could and even if you are careful.
Just some thought that were pouring from my head, hope they are helpful
An equity holding trust is the way to accomplish your goal without the risk of lease opt’s alone. Your Investor Beneficiary and your resident beneficiary are all made apart of your agreements to deal in the interest of the trust (personal property) rather than the (real) property itself.
I agree with the advice Wilson gave. Why would you use your good credit to invest with a poor credit risk? Particularly if it is a rental property, just buy it yourself.
