payment for a co signer - is this a good deal for both sides?

Question

I have my own house and one rental property. I can't qualify to get another mortgage on my own so I need a cosigner. Problem is none of my family is in a position to help. Here's what I was thinking as an incentive to get someone else to cosign:

Cosigner puts nothing down but signs the note. They get 10 percent of monthly rental income until we refi and get their name off the note. Additionally they'll get 3 - 5 % ownership based on their credit with the understanding that when we refinance and get them off the note we will also buy them out at that time.

So basically on a 200k house that rents for $2000 at 5% ownership taking 24 months to refi they'd make $7300 or more:

$4800 (10% of 24 months at $200/mo) PLUS

$2500 and some change (ownership buyout with a 25% down payment on 200k house assuming no appreciation leaves roughly 50k equity $50k at 5% = $2500).

Thoughts? or any other suggestions

Christopher Brainard · Answer

@Jonathan AlexanderI'm not sure why anyone would agree to this deal unless you put a substantial down payment on any house. The risk is simply too high for too little return. I also don't understand the 'equity ownership' part, you either own the house or you do not. If you're on the mortgage, you almost certainly have to be on the title and own a portion of the house, not the equity.Additionally, I don't see why owning two properties would disqualify you from getting a loan. I sense that there are other issues preventing you from getting a loan (Income, DTI, Credit). I assume your intentions are good, so my recommendation is to make this deal more strait forward and less 'creative'. Too many buzzers are going off in my head and I'm sure others are thinking the same thing.-Christopher

Christopher Brainard · Answer

@Jonathan AlexanderI think you need to step back and look at it from your potential partner's perspective. If I understand your plan properly, you're offering me 3% to 5% of the 25% equity in the house which is 0.75% to 1.25% of the home's value. I'm lowering my credit score, degrading my DTI, and on the hook if things don't work out (or you simply miss a payment when it is vacant) with a complete stranger. it's just peanuts and not remotely worth the risk.As far as your DTI goes, you should be able to manage that, if you have cash on hold and live a reasonable lifestyle. Income from your rental should cover that property + some extra, downsize your personal life if you must (pay off car, credit cards, etc). Short term sacrifices often lead to long term prosperity. The reason lenders look at DTI is to ensure that you can pay for the property you are buying. Vacancies happen, you can't be 100% reliant upon the income from the property to pay the mortgage.-Christopher

Tom S. · Answer

@Jonathan Alexander I'd look at it more in the shoes of the note signer: for signing a note and being fully responsible for $200,000, you're promising him $200 a month. Yes, there may be more to come with each passing month and upon the sale of the house. But what if things go wrong: market suddenly crashes again like 2008, natural disaster that's not fully covered by insurance, extended eviction and damage, etc. So there's lot of risk still. As a co-signer you're still fully responsible for the debt.I started off with the first few places with conventional loans, then I bought the next few with owner financing, lease options, or rehabbing places and gaining equity that way. So a few options to throw out there.Good luck!- Tom

Jonathan Alexander · Answer

@Christopher Brainard @Rob BelandPutting 25 percent down. My end goal is to hold these and have them paid off and use the monthly income as means of living so I'm trying to avoid partners. But whats the difference if the equity ownership? If I had a co owner and we sold the house and split the profits based on ownership percentage we'd be paying off the debt first and then be left with the equity to split by ownership percentage. The houses I'm looking at would be considered A neighborhoods so the quality of tenants and upkeep isn't as risky. I don't really see that much of a risk especially since they have no "skin" in it - only their name on the note - when you add to that they're only having their name on the note for 2 years or less and theyre getting 7k for it I thought it sounded like a good deal - but maybe not thus why I posted.As for my getting an additional mortgage my DTI isn't good enough with my current job. I've got 780 credit. You guys have any other suggestions to try and get an additional house?Thanks for all the feedback.

Rob Beland · Answer

Makes sense. I think its too complicated. What if you have a vacancy? Keep it simple. Why not just make him a partner with equity. Is this a buy and hold investment? Give him 5-10%. No say in the day to day. No percentage of rents.

Jonathan Alexander · Answer

the ownership would be on the equity. So if for some reason it took longer than 2 years to refinance and we paid down down the note so we owed 125k and the house was appraised at 200k then we'd have 75k in equity and they'd get $3750 for ownership purposes plus whatever the monthly 10 percent of rent came out to. Make sense? @Rob Beland

Rob Beland · Answer

I dont follow the ownership piece @Jonathan Alexander If they own 5% of a $200K house thats $10K. The buyout wouldn't be on the down payment only would it?