What would you do? (Real Estate Question)

[JSD]

Let me try this again:

Yes, I would just need the added income verification. My partner (brother) would then sit back and enjoy the equity built from the investment.

We already have the 2nd unit rented out to my friend's Joe and Emily for $900-$1000

A $300,000 two unit mortgage + monthly taxes = Roughly $2000/ month - 900 (joe and Em's contribution) = $1100/monthly payment

Which is only $200 more a week than my condo cost me. It's definitely doable I just need to find a solid duplex and get pre-approved (for that price range anyway).

What do you still owe on the condo, though?  It didn't seem like the $900 in rent you were receiving was all profit.  What would your total house payments (house and condo) be at that point?

I know where your going here...

Look, is my plan bulletproof? Obviously not because nothing is. When I bought my condo it was a risk but so far so good.

I make $1150/month one a 1 year lease.
We pay $950/ Month is Mortgage, fees and taxes

We have an emergency reserve in case our tenants flake that will cover 3 months rent.

So you'll still be committing $3000+ a month just in mortgage payments alone?  Even if you subtract $1000 from rent, that's over half your monthly income.  It just seems like a gigantic risk that will eliminate your savings for a long time to come.  If you were to do this, you'd flying without a safety net - the risks outweigh the rewards here.

That's not the case, my brother bares half the responsibility if the tenants bail on the multi unit.

So really it's $2000 (roughly) with $1150 of it being paid for my condo tenants. and so now I'm 25 years old with $100,000 of equity paying around $900 - $1100 a month.

[JSD]

So, he wouldn't be chipping in towards the mortgage payments?  In that case, I stand by my assertion that it would be horribly reckless - that's still a $300k mortgage supported by $45k income. 

From your brother's perspective, he stands to make some money if the house does appreciate, but he's taking a lot of risk as well; he's on the hook if you can't make the payments.  It's worse that you say it's your brother, if this DOES go bad, it's one thing to **** up a friendship, another to **** up a family relationship.  Tread VERY cautiously.

Let me echo this. 
Personal experience leads me to believe that it is best to not mix business with family/friends.  Many people think it will be different for them, many end up wrong.

Cman, please share your experience.

[MetroGlobe]

Nick, I don't see how 6.75 is modest (I currently have a 5.6)

You are not accounting for "rate bumps" or "pricing hits" that would be assessed to the interest rate because of your particular loan. First off it's a multi-unit property, so you get charged for that.  Secondly your down payment is a pittance, so you'll get charged for that.  Thirdly your co-borrower has bad credit, so you will be hit for that (a 1-2% bump, depending on his score).

So I think the estimate of 6.75% is quite low actually.  I think it would be 8% or higher.

[JSD]

Now we must add the criminal risks to the financial risks already mentioned.  Using your brother as additional income is occupancy fraud.  Depending on state laws, jail time and/or a hefty fine could be involved.

Here's a standard definition of occupancy fraud from wiki. .


Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.

link: http://en.wikipedia.org/wiki/Mortgage_fraud

ahh... ummm... I was kidding my brother will be moving into that other unit.  

[ChampKind]

Now we must add the criminal risks to the financial risks already mentioned.  Using your brother as additional income is occupancy fraud.  Depending on state laws, jail time and/or a hefty fine could be involved.

Here's a standard definition of occupancy fraud from wiki. .


Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.

link: http://en.wikipedia.org/wiki/Mortgage_fraud

ahh... ummm... I was kidding my brother will be moving into that other unit.  

So your brother pays half on the $300K home, or half on the condo you already own?

[the_Bird]

6.75% is not a low assumption.  However you look at it, this is a subprime mortgage.

If you do the mortgage yourself, you're way overleveraged, income-wise.

If you somehow partner with your brother, they're going to look at his poor credit score.

Your wife's income, when she had it, was all unverified.

NOBODY is touching sub-prime or Alt-A mortgages today because nobody can sell them into the secondary market, there are simply no buyers out there.  The credit crunch is still alive and well and all-powerful in this segment of the mortgage market.  

If you DO find someone willing to fund you (with or without your brother), it ain't going to be at 5.6%  Guaran-sheed.

[jambr380]

It is for these financial reasons (along with warmer winters) that I took the plunge and moved to Florida a couple of months ago. My friend and I bought a house for $100K in St. Petersburg. Now we are realizing this is not where we want to be, so we bought a $32K condo in Orlando. Now we have to try to sell this freakin' St. Pete house.

The numbers you guys are throwing out are just plain scary. I was laid off from my job and was making roughly what the original poster currently makes. I just don't see the point in buying a house that exceeds (or nearly exceeds) your means.

I guess this is all not really my business and I know that not everyone can (or wants to) move somewhere else and have no mortgage, but I consider myself very lucky to know I will not lose my place, even without a good job...

[JSD]

Nick, I don't see how 6.75 is modest (I currently have a 5.6)

You are not accounting for "rate bumps" or "pricing hits" that would be assessed to the interest rate because of your particular loan. First off it's a multi-unit property, so you get charged for that.  Secondly your down payment is a pittance, so you'll get charged for that.  Thirdly your co-borrower has bad credit, so you will be hit for that (a 1-2% bump, depending on his score).

So I think the estimate of 6.75% is quite low actually.  I think it would be 7.5% to 8%.

Ok. I'll let you know about that when I find out.

[Chris]

All of this is just explaining what I thought was clear anyway.

I can't speak for anyone else, but I think it wasn't clear because this sounds like a VERY risky way to get around rules that are there to hopefully protect you.

[nickagneta]

Let me try this again:

Yes, I would just need the added income verification. My partner (brother) would then sit back and enjoy the equity built from the investment.

We already have the 2nd unit rented out to my friend's Joe and Emily for $900-$1000

A $300,000 two unit mortgage + monthly taxes = Roughly $2000/ month - 900 (joe and Em's contribution) = $1100/monthly payment

Which is only $200 more a week than my condo cost me. It's definitely doable I just need to find a solid duplex and get pre-approved (for that price range anyway).

Again your math is seriously off. You will in no place I know find a bank that is going to fit a $300,000 mortgage and property tax payments and home owner's insurance and PMI into a $2000 a month payment. It's just not going to happen.

$300,000 at at a modest 6.75% given the risk associated with the lack of down payment and lack of income is a P&I of just about $2000. Add some hefty taxes for the areas you discussed, a couple grand or more for home owners insurance and nearly three grand in PMI and you're talking nearly another $600-$900 of added monthly money going into an escrow account at the lender to take care of those things and you are looking at more than $2600-$3000 a month mortgage payment. Heat, electric, cable, internet, food, and other and you really think you are going to have enough to live on?

Also, in this partnership your brother will be on the note and deed but will be used as income verification only and his credit will not be looked at? What type of loan are you looking at. I don't see a bank doing any of this.

Nick, I don't see how 6.75 is modest (I currently have a 5.6)

I came up with $2150 when including PMI and taxes(4500) at 6 here:

http://cgi.money.cnn.com/tools/mortgagecalc/

When did you get that 5.6% and how much were you financing? Big huge difference. This economy isn't that of 6 months ago never mind a year ago. Could you convince a bank to give you $300000 given your lack of down payment and lack of income? Maybe. But if you can to do so they are going to want something in exchange and that is going to be a much higher interest rate. I'm being kind in giving you the benefit of the doubt at 6.75%

Believe me. I know what I speak of. My dad was a VP of retail banking at one of the largest banks in Boston for 40 years and he taught me a ton about how these things work in the risk end of things. You will be getting nowhere near 5.6%. I put a $310,000 purchase in with $10,000 and $2500 home owner's insurance at 6.75% and sure enough, $2621 per month. Even at 5.6% the same thing comes out to $2400 per month.

[JSD]

Now we must add the criminal risks to the financial risks already mentioned.  Using your brother as additional income is occupancy fraud.  Depending on state laws, jail time and/or a hefty fine could be involved.

Here's a standard definition of occupancy fraud from wiki. .


Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.

link: http://en.wikipedia.org/wiki/Mortgage_fraud

ahh... ummm... I was kidding my brother will be moving into that other unit.  

So your brother pays half on the $300K home, or half on the condo you already own?

2000/month my brother pays half
950/month tenants pay all

[nickagneta]

Nick, I don't see how 6.75 is modest (I currently have a 5.6)

You are not accounting for "rate bumps" or "pricing hits" that would be assessed to the interest rate because of your particular loan. First off it's a multi-unit property, so you get charged for that.  Secondly your down payment is a pittance, so you'll get charged for that.  Thirdly your co-borrower has bad credit, so you will be hit for that (a 1-2% bump, depending on his score).

So I think the estimate of 6.75% is quite low actually.  I think it would be 8% or higher.

TP4U Thank you for explaining that

[ChampKind]

Now we must add the criminal risks to the financial risks already mentioned.  Using your brother as additional income is occupancy fraud.  Depending on state laws, jail time and/or a hefty fine could be involved.

Here's a standard definition of occupancy fraud from wiki. .


Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.

link: http://en.wikipedia.org/wiki/Mortgage_fraud

ahh... ummm... I was kidding my brother will be moving into that other unit.  

So your brother pays half on the $300K home, or half on the condo you already own?

2000/month my brother pays half
950/month tenants pay all

Got it.  Sorry about the confusion, I had thought that your brother was simply a figurehead in the $300k house.  So that drops your monthly payments down considerably, but still too much at your salary to make it a worthwhile risk.  Why not wait until your wife has steady employment and reassess?  As many people have mentioned, time isn't working against you here, and you actually stand to benefit from your patience.  At the same time, you can build up your savings, which will help lower future lending rates through a higher down payment, and help you retain some money when you actually do purchase a home.

[Cman]

So, he wouldn't be chipping in towards the mortgage payments?  In that case, I stand by my assertion that it would be horribly reckless - that's still a $300k mortgage supported by $45k income. 

From your brother's perspective, he stands to make some money if the house does appreciate, but he's taking a lot of risk as well; he's on the hook if you can't make the payments.  It's worse that you say it's your brother, if this DOES go bad, it's one thing to **** up a friendship, another to **** up a family relationship.  Tread VERY cautiously.

Let me echo this. 
Personal experience leads me to believe that it is best to not mix business with family/friends.  Many people think it will be different for them, many end up wrong.

Cman, please share your experience.

I have many examples:  2 best friends who opened a brewery in France (which ended up being successful) who now don't talk to each other; 2 good friends who opened a moderately successful restaurant in Oregon who are now less good friends (they at least still talk); and for personal reasons I won't discuss family member stuff, but will leave the following for you to ponder:

What happens if you brother suddenly needs the money that he put into your place?  How will he cash out?

[MetroGlobe]

Nick, I don't see how 6.75 is modest (I currently have a 5.6)

You are not accounting for "rate bumps" or "pricing hits" that would be assessed to the interest rate because of your particular loan. First off it's a multi-unit property, so you get charged for that.  Secondly your down payment is a pittance, so you'll get charged for that.  Thirdly your co-borrower has bad credit, so you will be hit for that (a 1-2% bump, depending on his score).

So I think the estimate of 6.75% is quite low actually.  I think it would be 8% or higher.

TP4U Thank you for explaining that

8 years in the mortgage business as a loan officer.  Personally, I don't think this loan has a shot in hell, no matter what kind of shenanigan's he tries to pull with his brother.  I know I wouldn't touch it, because it's got fraud written all over it.  And that would put my license and career in jeopardy, not to mention possible criminal charges.  Banks are far to eager to prosecute even for perceived misdeeds these days.

But maybe he'll find a shoot-from-the-hip, risk taker type loan officer to help him massage this through the system.  That's his prerogative.  I have very little doubt where that story would end though - foreclosure proceedings, followed by stiff penalties (probably not jail) when they fully investigated why the loan went bust.