Quitclaim Deed - Conventional Mortgage Question

[Donnie Maguire]

I have a unique situation that I cannot seem to find a very clear answer for, hopefully the BP community can assist.

My wife and I got married last September and now live together in a house we purchased together. Before that, she was living with her sister in a house they purchased together. Her sister still lives in the house with a roommate so my wife's portion is covered. Her sister is engaged and will be married in the fall and will be moving out of the house into a new one with her soon to be husband. 

My wife and I currently have 2 single family long term rentals and would like to add this to the porfolio due to their 3% mortgage and high equity. Her sister has agreed to us paying out her portion of the equity and having us use this as a rental. 

I know we can have a lawyer draft up a quit claim deed to get her sister off of the deed, but I have head this is similar to when people transfer ownership to LLC and could pull up the due on sale clause?

Is there anyway to get her sister off the mortgage without refinaning? 

Just trying to figure out our options here, would love to keep the interest rate if possible for obvious reasons. Curious if anyone that has dealt with a divorce/separation scenario that might be teh most applicable.

Thanks!

[Matt Miller]

Congratulations on your recent marriage and expanding your real estate portfolio! Your situation is unique, and keeping that favorable interest rate is important. While there aren't any real ways to remove the sister from the loan, here are a couple of tips you might consider:

1. 1. Quit Claim Deed & Due on Sale Clause: Transferring ownership via a quit claim deed can sometimes trigger the due on sale clause, which allows the lender to demand full repayment of the loan. While this clause is often present in mortgage agreements, it’s not always enforced. However, it’s important to proceed with caution and consult with a real estate attorney to understand the potential risks.
2. 2. Joint Ownership with a Formal Agreement: Another option is to keep the mortgage as it is but create a formal agreement where your sister-in-law is no longer financially responsible for the property. While not necessary, this agreement can make it easier to prove to the lender that she isn't financially responsible, potentially allowing the debt to be eliminated from her debt-to-income (DTI) ratio. However, lenders typically need to see that debt payments have been made by the other party for a certain period of time to remove it from the DTI (12 months usually). This can be formalized with a legal document specifying that your wife and you will handle all mortgage payments and management responsibilities.

Hope this helps! Feel free to reach out if you have more questions.

[Donnie Maguire]

Formal agreement may make the most sense, she is willing to help us out and if she has to be on the mortgage afterwards that shouldn't be an issue. Having a lease in place will wipe that from her DTI if she needs approval for something else anyway.

Wasn't hopeful the banks would work with us so sounds like we are stuck until we refinance. Appreciate the feedback!

[Jaren Woeppel]

Great information from @Matt Miller!

Just a small bit of information to arm yourself in regards to the lease and your wife's sister's DTI. Most of the time, lenders will only qualify a percentage of the rent towards your DTI. For example, if rent is $1,000/month and your lender will qualify 80% of the rent, you may only be able to qualify $800/month of that towards the DTI. May not affect your situation at the moment but something to keep in mind as you grow your portfolio.

[Donnie Maguire]

Thanks Jaren for the info, our lender used 75% if it was not on our last years taxes and 100% if it was when we purchased our last primary. Fortunately with the rent/mortgage ratio we would be fine either way due to the low rate, but certainly something to keep in mind if different lenders have different standards. 

[Ned Carey]

@Donnie Maguire Just to be clear you have two separate and distinct issues. 

1) getting your sister in law off the title (deed) 

2) getting your sister in law off the mortgage. 

These are unrelated. Fixing one does not affect the other. 

Yes the due on sale clause is a real issue with the mortgage. Mortgage companies want to get rid of the low interest loans. They have no incentive to make it easy for you. While loans that are being paid on time are rarely called, given the dramatic change in interest rates lenders have an incentive to call the low intert loans. 

[Donnie Maguire]

Ned you’re correct two separate issues that unfortunately doesn’t look like any great workarounds. Not surprising with the increase in rates and then banks unwillingness to help the little guy out. Appreciate the insight. 

I think she is fine with the mortgage being under her name as we can work with that, I just want to make sure the ownership is captured so there aren’t any title issues in the future. Maybe that means we refinance sooner rather than later and have an official sale to make it clean. 

[Jay Hurst]

Quote from @Donnie Maguire:

Ned you’re correct two separate issues that unfortunately doesn’t look like any great workarounds. Not surprising with the increase in rates and then banks unwillingness to help the little guy out. Appreciate the insight. 

I think she is fine with the mortgage being under her name as we can work with that, I just want to make sure the ownership is captured so there aren’t any title issues in the future. Maybe that means we refinance sooner rather than later and have an official sale to make it clean. 

 It is not about not wanting to help the little guy out. (for sure they do not, but that does not matter in this case) as the note signed at closing lays all this out. The underwriting was done on the original borrowers  and conventional loans are not assumable. BUT, even if a bank wanted to help out they cannot because they are only the servicer of the underlying note/mortgage. The actual mortgage was packaged up and sold long ago (within a few weeks of closing) in the form of a mortgage backed security. (just a bond backed my the cashflow of mortgages). So, the servicer cannot change the terms of the mortgage that they do not own but is owned by a pension fund in Denmark. 

[Ned Carey]

@Donnie Maguire

Perhaps there can be a contractual agreement between the sisters showing the split of equity in the property with one sister getting zero for an approprate consideration. In combination with that perhaps have here create a quit claim deed that remains unrecorded so as not to trigger the due on sale clause. At the time the property is sold or refinanced the quit claim deed could then be recorded. 

Obviously talk to a good attorney about this. I am sure ther are asome creative ways to protect your interest without triggering the due on sale clause. Also perhaps some kind of trust could help. Again speak to a good attorney. 

[Stephanie Medellin]

What type of loan do they have?

[Donnie Maguire]

Conventional through Chase. My wife called and they said they would actually let her assume the loan somehow, just a $900 assumption fee and closing costs. She is going to work on the application in the next couple days and hope to have some good news there, would be the best option for all of us involved.

[Ned Carey]

@Donnie Maguire  WOW that is amazing! I suspect highly unusual. Perhaps they figure that getting assumption fee and new closing costs is a s good as refinnancing for them. Could this be a new trend to open up the marketplace? 

[Jay Hurst]

Quote from @Ned Carey:

@Donnie Maguire  WOW that is amazing! I suspect highly unusual. Perhaps they figure that getting assumption fee and new closing costs is a s good as refinnancing for them. Could this be a new trend to open up the marketplace? 

 I have seen this before from servicers, and then 6 weeks later "oh, we are sorry but your loan is not assumable".