How-to Qualify my Tenant-Buyer for refinancing later on?

[William Morgan]

I am buying a property that I will serve as a new home for my nephew. It's a foreclosure, needs minor repairs and does not qualify for FHA etc and he does not have the 20-25% down needed to do the deal. I will be buying it in my name only. I'm purchasing it for $103k and after repairs it should appraise at $150k after 1 year (or less) of seasoning.

The plan is to have him occupy using an instrument that will allow him to refinance after 1 year. This might be something like a Contract for Deed with regular monthly payments but where I hold the deed until I'm cashed out. If the property appraises as I expect he should be able to cash me out with a loan at 80% LTV thereby giving him low cost financing without the need for a 20% down-payment from him.

My question is what is the best instrument for this?  I was thinking a Contract for Deed (yes I know about Dodd Frank) during his 1st year of occupancy would eventually make him eligible for a refinance loan vs purchase financing and it's requisite down-payment.  It would show a payment history and ownership rights so should enable him to refinance it with out a downpayment providing the equity is there - correct?  

Can anybody weigh in on this strategy or perhaps a better one that would enable a Tenant-Buyer (for lack of a better term) to be eligible for refinancing vs purchase financing?

-William

[Chris Mason]

Hi @William Morgan,

This wouldn't actually be a refinance, it would be a purchase. I think you are over-complicating with the fancy stuff that REI need to use. Please allow me to simplify.

Depending on where your equity position stands a year from now, a gift of equity from family (like, say, an uncle... you) could solve the down payment problem while avoiding PMI. Your nephew can do something that no real estate investor would ever be permitted by a traditional mortgage lender.

Example using simple/round numbers:

• Seller wants to net $75k.
• Buyer wants competitive 30 year fixed financing, and to come out of pocket with very little money, and wants to avoid PMI. (These are things everyone wants, but we could actually set it up so your nephew gets all of these things AND you get what you want to net)
• Home will credibly appraise for $100k. (This is a big one, don't get too silly with your contract sales price)
• Contract sales price: $100k w/ 20% down and a $20k gift of equity for down payment towards a family member who will or is owner occupying, $5k credit for closing costs.
• Buyer out of pocket: about as close to $0 as can be done. In reality, the buyer cannot "make money" buying a home, so we buffer it a couple grand to account for property tax prorations etc.
• Seller nets: $75k.

NOTE: Before all you real estate investors get excited and start making threads proposing crazy things--

- Gift of Equity can only be between family.

- Making up familial relations where none exist would constitute mortgage fraud.

- The person buying the home MUST intend to occupy.

- There are some other nuances, not all loan originators / lenders do GoE.

Now, as for the mechanics of this... don't buy that home until your nephew is solidly preapproved. Not 1-800-Quicken and a 5 minute phone call preapproved, but like.... all paperwork, no exceptions. And then your nephew's job is to not screw up their income/credit situation during the next 12 months, because that would invalidate the snapshot in time captured by the lender. Normally the dollar amount consequences of a lender dropping the ball are <$2k -- appraisal fee and some inspections. In this case, the lender dropping the ball means you're (probably) stuck in some crummy hard money loan AND your nephew will not get to own the home he has been living in AND there would be ugly family drama.