Need help with a lending situation

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Need help with a lending situation

Sal Mazzone
Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes

BP community-

I'm in a bit of a situation. I'll try to keep it as simple as possible:

I'm in contract on a duplex that will be a buy and hold rental. Partnering with two other individuals, creating an LLC, and obtaining a commercial loan on the property.

I'm also trying to purchase a new primary home simultaneously, while holding onto my current primary and converting it to a rental. (I have contracts in hand)

My wife and I have very strong W2 income, and we also have another rental property cash flowing decently. Both my primary and my current rental have a decent amount of equity.

The issue is my personal mortgage broker said that since the LLC is newly formed, the entire loan on the duplex would be considered my debt, even though I have two other partners. This will more than likely cause the new primary residence loan to not be issued.

Does anyone have any suggestions for this situation, or any lenders they can recommend that would look at this from a holistic approach?  

(All properties are in Westchester county, New York.)

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  • Matthew DrouinPro Member
    Developer · Rochester, NY · Member since 2016 · 406 posts · 339 votes
    10y

    @Sal Mazzone I have a couple of questions. Is the debt on the duplex in your name or in the LLC name? Even if there is a personal guarantee on the duplex it shouldn't show up on your credit report. It is considered a contingent liability on your personal balance sheet when you go to fill out a PFS or personal financial statement. As long as this loan doesn't show up on your credit, you don't need to report your interest in the LLC to the bank. Well... you should report it but you don't have to. ;-). As long as this is the only hair on your file to purchase the primary residence a bank should fund your deal. The fact that you are keeping your former primary residence as a rental could raise an eyebrow with Fannie and Freddie underwriters though. If you run into an issue with that you may either need to sell it or refinance it into an LLC with a portfolio lender... but you may run into no issue at all.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    As per Fannie guidelines, the debt does count....I believe it's when you own more than 25% of an LLC and have a personal guarantee.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Wayne Brooks  with my commercial banks rule of thumb is anyone with 20% or greater needs to be underwritten and qualified and any PG's that the bank may require is signed by anyone with 20% or more ownership interest.

    I am not an expert of public financing guidelines like this.. good mortgage broker should be able to figure it out.. It does seem odd that they would stick all the debt on one person though.

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  • Sal Mazzone
    OP
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y

    is it both? 25% AND personal guarantee. The operating agreement hasn't been completed yet, I could lower my percentage. But I would still be personally guaranteeing the loan since it's not a non-recourse 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Sal Mazzone get the loan as Tenants in Common then flip it over to your LLC.

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  • Sal Mazzone
    OP
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y

    I posed the question to my lender about it being a contingent liability and this was the exact response: 

    "Because the LLC will be newly formed during the purchase of this commercial deal, the underwriters would qualify you taking on 100% of the financial obligations to that property to qualify you for another purchase."

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  • Sal Mazzone
    OP
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y
    Originally posted by @Jay Hinrichs:

    @Sal Mazzone get the loan as Tenants in Common then flip it over to your LLC.

    Jay- are you suggesting purchasing the primary I am trying to acquire as tenants in common or the duplex? I've actually never heard of TIC and just had to do some quick research so I don't know much about it.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    Primary is your primary.

    the duplex is a partnership nothing wrong with you guys simply taking title as Tenants in common as to a pro rata share ownership.. you each have to qualify and sign the loan docs...

    Tics with unrelated parties have some securities issues but with close knit partners its fine.

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  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    @Sal Mazzone Do you trust your partners...why could't you relinquish your interest in the LLC temporarily and then re-join after the deal closes?...how did you qualify for the duplex loan...and why are you referring to it as commercial?...

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    @Sal Mazzone If you sign a personal guarantee on the loan, you and each of your partners will All be responsible individually for 100% of the debt (not limited to 33% each).

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  • Sal Mazzone
    OP
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y
    Brandon Sturgill I do trust them (it's family) but I've already personally signed the contract with them to the seller. If I pull myself out of financing and they do not get approved then that's tricky with the financing contingency. I'm referring to it a commercial because the loan is a commercial loan on a residential property. An LLC cannot get a conventional mortgage.
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  • Ceasar Rosas
    Real Estate Broker · Bronx, NY · Member since 2011 · 597 posts · 341 votes
    10y

    @Sal Mazzone

    From my understanding regardless of what percentage you own they would want all of you responsible for 100% in case the others default.

    If you've done this before has the mortgage broker taken 75% of the rental income into consideration?

    Are you working with a big bank or smaller bank?

    Maybe you can delay the investment property until you close on the purchase of your primary property...

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  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    @Sal Mazzone Makes sense...will your lender collateralize your properties...or consider a blanket loan?

    Why do you need to take title in the LLC up front?...why not transfer after closing.

    Do you have a second lien on your current primary?...you said you were "trying" to purchase a second home. If your first home is not FHA, pull the equity in a HELOC...don't know if there is enough to cover the duplex...but you might be able to leverage private money and move away from a traditional lender...you can always re-fi later...

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  • Sal Mazzone
    OP
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y

    Hey all- thanks for the help.  Spoke to another broker/lender who advised it would not be an issue after he assessed our personal financial info and rental incomes.  

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  • Scott WolfPro Member
    Lender · Boca Raton, FL · Member since 2014 · 1k+ posts · 958 votes
    9y

    Hi @Sal Mazzone what lender did you speak to in the end? I'm looking to invest in Westchester and am currently searching for a commercial mortgage broker.

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  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    9y

    @Sal Mazzone Curious as to the solution myself to see if I was on the right track. I was thinking that it shouldn't matter if they hit you with those debts as they are going to give you rental credit for them. 

    Conforming rules allow for you now to convert your primary to an investment, regardless of your equity position.

    As for the Duplex, they should be able to utilize a rent schedule, done by the appraiser, included on the appraisal, in order to offset a large percentage of the PITI.

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  • Christian Reyes
    Real Estate Agent · Garrison, NY · Member since 2016 · 92 posts · 24 votes
    9y

    I'm not completely sure whats going on but just reading this thread has been incredibly eye opening.

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