How does a mortgage work for Tenant in Common Deed?

[potsticker]

My parents have decided to relocate/retire to Irvine. In the next month or two, they will begin looking in earnest for homes in the $1.0m-$1.2m range.

One of the things that I've decided to do is sell my rental condo unit in the Bay Area. My plan is to take the equity and do a 1031 exchange into whatever property my parents buy. It'd be deeded as a Tenancy-in-Common, with each party owning a specific percentage (i.e. me owning 40%, my parents owning 60%). I'd then rent back my portion of the home to my parents. I've spoken to two 1031 facilitators, and both have deemed this as a viable plan.

Question is - how would a mortgage look in this situation? Would my parents and I be co-borrowers on the loan? Or, would I be a non-occupant cosigner because I won't be living there? Would I be on the loan at all?

From a qualification perspective, my parents alone should qualify with no problem (800+ FICO, low debt, several income sources). Adding me as a borrower or co-signer would likely help as well. In total, we'd end up putting around 35%-40% down.

Thoughts on the best way to do the loan on this?

 

[Perspective]

Your loan originator and title company will work out the details - no biggie. The better question is, why would you do this? I'd rather own my own separate rental condo than own a share of the house in which my parents live. Sounds like a terrible idea.

 

[SoclosetoIrvine]

For tenant in common, like you mentioned, your parents 60% and you 40%

You would both be on the deed and both be on the loan.  Title and escrow would confirm with you the exact ownership percentages in the paperwork.

Things to watch out for since I'm doing something similar: in a 1031 exchange, every tax ID would need to pay a 1031 company the flat rate (usually 600-900) so are you using 3 different tax ID's? you, your mom, and your dad? or do your parents have a trust I assume?

No biggie tho, your title and escrow would handle it

If it's someone like your parents, wouldn't joint tenancy just be easier? Since in the event something happens to them, you would take over 100%

Unless they have someone else that isn't you set up in the event of their death, that their assets would go to...... not sure the point of a tenancy in common with parents/son...  ???

 

[potsticker]

Your loan originator and title company will work out the details - no biggie. The better question is, why would you do this? I'd rather own my own separate rental condo than own a share of the house in which my parents live. Sounds like a terrible idea.

Agree that on the surface it probably doesn't seem like a good idea - but after factoring in my current finances/investments, family situation, and the peak of the bay area housing market - it makes a lot of sense for me. I'm pretty well setup to purchase another investment property when the market reaches a bit of a plateau so that also factors into my thinking.

 

[potsticker]

For tenant in common, like you mentioned, your parents 60% and you 40%

You would both be on the deed and both be on the loan.  Title and escrow would confirm with you the exact ownership percentages in the paperwork.

Things to watch out for since I'm doing something similar: in a 1031 exchange, every tax ID would need to pay a 1031 company the flat rate (usually 600-900) so are you using 3 different tax ID's? you, your mom, and your dad? or do your parents have a trust I assume?

No biggie tho, your title and escrow would handle it

If it's someone like your parents, wouldn't joint tenancy just be easier? Since in the event something happens to them, you would take over 100%

Unless they have someone else that isn't you set up in the event of their death, that their assets would go to...... not sure the point of a tenancy in common with parents/son...  ???

My exchange facilitator said that TIC would be the recommended way to go as on the deed it outlines what % of the property I own. Additionally, they are charging me a flat $1,000...there wasn't an extra charge mentioned for additional tax ID's...but, I should give them a call and confirm.

 

[peppy]

Don't forget to consider the estate planning implications of this. You get survivorship rights but there could be complicating factors (e.g. multiple heirs).

 

[potsticker]

I wanted to add an update. This week I spoke to Soylent Green as well as another lender. If any of the funds come from a 1031 exchange, you have to go with a non-owner occupied loan. There's a max loan of $650k for non-owner occupied.

 

[Perspective]

I wanted to add an update. This week I spoke to Soylent Green as well as another lender. If any of the funds come from a 1031 exchange, you have to go with a non-owner occupied loan. There's a max loan of $650k for non-owner occupied.

What's the premium on the rate for non-owner-occupied loans? One or two points?

 

[potsticker]

My understanding is it depends if the loan is conforming (Fannie/Freddie guidelines) or non-conforming. For conforming, it's 0.5%-1% higher. Non-conforming could be less of a premium.