The man won't let me house hack (for the moment)

[Luke Petro]

Hello!

Two and a half years ago, I bought a multifamily with an FHA loan, lived in it for about a year and moved out.

Then last summer, did the same thing, this time with Home Possible.  

I was planning to get another FHA loan this summer (I have a qualifying event: had a baby), or refinance the first house, and do it one more time. So I called a couple lenders and they said, "no way you're going to get another owner occupied loan like this through underwriting, at least this soon."

I was explaining this to a non-investor friend, who wants to buy, and his ears perked up. He said, "I want to do what you're doing but I don't really have time or know how," and offered to let me leverage his FHA if I paid the down payment, managed the property, and taught him what I know.

So there it is: he secures the financing and I get added to the title after close. 50/50 partners on an FHA deal.

I thought I would share this scenario with the BP community and see if I'm overlooking something.  Could this work on the financing/legal side of things?

[Erik W.]

"offered to let me leverage his FHA"

I am no legal expert, but this sounds like one of two things: 1) tip-toeing around the edges of mortgage fraud or 2) simply a bad idea.  I can't say for sure because I don't know precisely what your intentions are.

First, don't think for a minute that you'll get owner-occupied federally insured funds unless your friend lives there, period. That would be outright fraud if he were to try to get an FHA loan and then have you live there along with 3 tenant, or just have 4 tenants. He MUST occupy the residence, and most lenders require occupancy for at least a year to qualify for those rates and terms.  The reason FHA offers those sweet rates and terms is they assume the owner is living there and will take a much greater pride of ownership than your typical investor, so that should be the deal that everyone follows before, during and after the loan.  If he says he "intends" to live there but has no such intentions, or if he "changes his mind" the day after you close and decides not to move in, that is lying/fraud: period.  Don't do it.

On the other hand, if he does move in and you get added to the ownership after the deal, that is, again, tip-toeing on the line of fraud. FHA loans were never intended to give investors the inside track on buying up tons of property, and by deeding you ownership he will also be violating the "Due on Sale/Due on Transfer" clause I'm 99.99% sure will be in the mortgage documents. I know some hot-shot gurus pull these stunts all the time with buying "Subject To", and they all swear none of their notes have ever been called, but that's beside the point. If your friend signs a document that says, "I promise not to Deed this property to anyone else without the bank's written permission" then turns around and Deed half of it to you, then he had lied. Plus, you really want to co-own a 4-unit that only has 3 tenants in it to make it cash flow with someone who has zero real estate experience? Ugh, sounds like a drama/disaster.

My advice: just pay the extra 1%-1.5% rate and get a commercial loan on 20 years.  If the deal isn't good enough to make sense at those numbers, it's a sub-par deal to being with.  I would simply find a better deal.  

Without more information, I can't even say I've got enough facts, but based on what I see so far, this is the best advice I can give.  If you care to give more info, I may be able to make better suggestions.