2 vacation home loans. 2 partners. 1 market. Is this possible?

Question

Hi BP!

I'm hoping you can help me with this scenario. I'm planning to purchase a single family STR with a partner and there are a few things we are hoping to achieve.

What we want to do:

-Finance using 10% down second home loan and do the same on another property in the same market within a year (our primary residences are on the other side of the country and we will personally use the property a few weeks a year)

-Ensure both parties have a claim to ownership (e.g., if one person dies, the other person needs to be able to say "hey I own part of this property")

Other assumptions:

-Down payment would be sourced 50/50, though each partner can front this themselves and be paid back at a later date (i.e., an individual partner can qualify without needing the other)

-The parties are not in any way related, simply business partners

-Both parties have excellent credit, DTI ratios, and W2 income

One may say "why not just buy it yourself and ditch the partner if you can do this on your own" but for the sake of this question let's assume partnership is a given.

An option I am researching is to have partner A solely on the loan. Partner B is not on the loan, this way partner B can secure a 10% down second home loan in the future without being denied for having a property in the same market already. Does this mean partner B should not be on the deed? If partner B is on the deed but not on the loan, will a lender still flag this as already having a property and not allow the 10% down second home loan? If partner B is not on either one, how do they ensure they have an ownership claim? Does a written agreement between both parties suffice? Should partner B be quitclaimed onto the deed at a later date? Should the property be quitclaimed into an LLC owned by both partners? If quitclaiming, do you still have the issue of not being able to secure another 10% down second home loan or a due on sale clause?

Understood that an attorney is the best source - just getting a feel for what others have done. Hopefully this stream of consciousness makes sense...thanks in advance!

Mitch Davidson · Answer

Hi @Taylor Robinson. In your hypothetical scenario, no, the lender doesn't see that the partner is listed on the deed (only) of the property you own, nor does the lender see which properties you own when you're being proposed to be on the deed only. Neither of you are responsible for the mortgage bill on the other's property, and the lender doesn't pull credit on the person to be on title only.

That said, I wouldn't be as excited about classifying the home as a conventional, second home as we were in the past. Effective for loans locked about 6 weeks ago, rates for second homes are now just about the same as those for conventional, investment, thanks to changes made by FHFA. Meaning, the rate is now quite high, and typically with points because the lender can only go so high on what rate they can offer. Thus, the only real benefit for a second home loan now is that the minimum down payment is 10% instead of the 15% minimum of the investment classification. And putting 10% down instead of 20% down comes with a points cost, meaning at least a few grand on a loan of $400K or so.

Mitch Davidson · Answer

Hi @Taylor Robinson. I think you’re on the right track. If you were on the mortgage and your partner was going to be only on the deed, we wouldn’t look at the partner’s credit profile or real estate owned. And the same would be so when the partner makes a purchase and has you only on title.

The partner would not be able to contribute to the down payment, closing costs, deposits, or reserves, but if their contribution was old enough that it didn’t show in your most recent two bank statements (for the accounts used for down payment, closing costs, deposits, or reserves), the funds would be effectively seasoned and therefore allowed.

Hope this helps. Happy to discuss further.

Chris Mury · Answer

Excellent advice, Mitch. I've used this exact strategy before and it worked exactly as you've described.

Chris

Chris Mury · Answer

Because you can't get a second home mortgage in an LLC.

Ronald Rohde · Answer

I don't think this structure works. Why not just JV both into an LLC? Vend in any personal money (HELOC, savings, etc.) then the property is secured by LLC and PG both parties.

Zeona McIntyre · Answer

Haha! I think people think of lenders as detectives but it is just not the case. They definitely cannot see and do not look at title, only what they can pull from a credit report.

I personally am less worried about interest rates looking at the life of the real estate investment over the long term, so I think the 10% down is still an awesome perk!

Taylor Robinson · Answer

@Mitch Davidson and @Zeona McIntyre

Thank you both for the replies, this was very helpful!

So assume for this first deal, I am on the loan and the deed and my partner is only on the deed. When my partner goes to qualify for a second home loan for a property in the same market some time in the future, does the lender not care (or not see?) that he is on the deed for a property in that market already? Does this not rule them out from qualifying for the second home loan? What if all income/expenses for the first property flow through a shared bank account (or not even shared bank account, but my partner’s share of profit/loss goes to his bank account each month)? Is this a concern for the lender that would rule out a second home loan?

Zeona McIntyre · Answer

You can and should have one person on the loan if they can easily qualify. The reason being that it is easy to get the first ten loans in one person's name but it becomes more challenging after that. Ten may sound like a lot on the onset but purchase confidence happens fast.

Another reason that you might want to have a single person on the loan is so that the other partner can get a 2nd home loan in the same market, since each person only gets one per 100 miles.

You are also correct that both people can be on the deed, even though just one is on the loan.

2 vacation home loans. 2 partners. 1 market. Is this possible?

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