Fannie Mae 0% down investment property acquisition scenarios

[Chris Mason]

About a month ago, Fannie Mae has removed the requirement for continuity of obligation on rate/term refinances. I've been trying to figure out what the "TLDR" of this is, and how it impacts people acquiring and unloading of real estate (no use of the word "buyers" and "sellers" here, because we're not talking about "purchase" mortgages... so everyone is just a "borrower").

TLDR that I've figured out: that means I can call it a refi even if you don't own the home yet, but the new mortgage amount can't be for any more than the current mortgage balance of the current borrower (current borrower can't make money on the end-transaction, no room for realtor commissions, etc). You will be added to title at closing, the person that currently owns the home quitclaims, leaving you as the sole person on title with the debt in your name and your name alone. And this is at sexy Fannie Mae rates, not hard money rates. We need to be careful we don't say "seller" and "buyer," because this isn't a purchase mortgage... it's an innocent refinance. :P

SCENARIO 1, the complicated one:

Joe owns his home free and clear. Joe doesn't want to own this home any more. Joe takes out a $400k mortgage, borrowing from his friend Frank. This is recorded at the county, it's an official $400k mortgage.

One month later, Sally comes along. Sally applies for a mortgage loan to rate/term refinance Joe's debt. There is no down payment requirement on a rate/term refinance, only an LTV requirement. Suppose the home appraises for $550k - great, LTV is 73%. Joe isn't a the lender's borrower, so the lender can't pull Joe's credit, ask him to prove that he's been paying his mortgage, and so on. All the lender can really do is go see if there's a mortgage officially recorded at the county. Towards the end, a payoff demand will be requested of Frank. Frank sends Sally's lender a payoff demand asking for, say, $402,153k to be paid off. Because Sally is our borrower, not Joe, Frank doesn't even have to claim that Joe has made a single mortgage payment on time, just that Joe owes Frank $402,153.

Sally goes to sign loan docs, Joe sitting across from her quitclaims off title. Sally's loan funds, with net proceeds going to pay off Joe's mortgage that he took out by borrowing from his buddy Frank.

Unless I'm mistaken, I'm pretty sure that Joe just got to walk away with $400k, and Sally just picked up an investment property for 0% down, using Fannie Mae 4%-5% interest rate financing.

@Jerry Padilla @Upen Patel - pick it apart, tear it up, tell me what I missed now that continuity of obligation is gone for rate/term refinances. 0% down investment property seems too good to be true.

Hey @Shari Peterson ya know what Joe could maybe have used in that scenario if he wasn't buddies with Frank and his $400k? A transactional lender. Question for you as well. What if that $400k never actually goes into Joe's account(s), what if it just sits in a designated account held by a some entity that you have control over with Joe as the beneficiary or something (@Matthew Kreitzer come be a "i am not giving legal advice i am not your lawyer," lawyer, for a second)? What's your risk in that scenario? 

SCENARIO 2, the simple one:

I want out of my house. I have equity. I'm perfectly fine with making zero dollars, I just want out of the house without ruining my credit. Hell, I'd even be happy staying on as a tenant, I just don't want the responsibility. How's about you come rate/term refinance my mortgage and title to my property into your name, and I quitclaim at the closing table? 

[Stephanie Medellin]

You definitely pose an interesting point.  I was looking at the guidelines for this not too long ago, and I can't really find anything that would indicate that it couldn't be done.  The guidelines I see address when cash is taken out, but not when zero cash is taken out. 

Not sure if this was a typo, but Joe wouldn't be walking away with $402k, it would just go directly to pay off his loan from Frank, so I don't see Joe benefitting from this transaction.

The only thing I can think of at the moment is that the new borrower might have to be treated as a non-owner occupant since their address will be elsewhere, and they are just refinancing.  Because they are not "purchasing" the home with a sales contract, there is nothing indicating they will be moving into the home. 

Also, I think the lender would still want a grant deed to be used instead of a quitclaim.

It would probably be a great option if the "seller" or borrower who wants off title and off the loan does not expect any profits, but how often would this really happen in an arms length transaction.  The "seller" wouldn't want to just give up $150k in equity to a stranger.