Wednesday, August 15, 2012

A Loan On Half A House?

What if your client only owns half the house? And the other owner can't sign can you get them a loan?

Nancy was in just that bind. She inherited of her aunt's house - her brother inherited the other half. She needed to borrow money right away for repairs to the house- the problem was that her brother was in the middle of a nasty divorce, and couldn't sign anything.

This is where a partial ownership loan, a loan secured by one part owner's interest only, comes into play. (Partial ownership loans are also referred to as partial interest loans, or partner loans.) With a partial ownership loan, the lender makes a loan to one of the owners, secured only by their interest in the property. The other owners don't sign anything, and the only collateral the lender has is the signing borrower's partial interest in the property. Nancy was able to borrow against her share of the property, without needing the brother's signature or being impacted by his problems. (This can also be useful in cases where the other owner simply refuses to sign.)

What if the lender forecloses and acquires the partial interest in the property? Do they become partners with the other property owner? Yes. That's why it's an unusual program. Partial interest loans are made on any undivided interest in real property, so it could be a one fourth interest, a one fifth interest, or even a smaller percentage of ownership. (Married persons cannot use this program to borrow against community property without the spouse's signature.)

How can a lender do this? The underwriting criteria that regulates most capital sources like mortgage bankers, insured depository institutions, and credit unions would restrict them from making partial ownership loans. On a similar note, mortgage brokers who use private investor funds are restricted from placing their investor's funds into these loans. Privately held portfolio lenders are the source for these. These lenders have and loan their own funds and must originate, service and hold the loans until they're repaid in full.

The other challenge in this type of lending is title insurance. It's often difficult or impossible to obtain traditional title insurance for these loans, so lenders sometimes have to self insure, meaning they handle title problems on their own.

While you won't run across the need for this program every day, when you do, it can be a real lifesaver for your client. Partial ownership loans often lead to another loan when matters relating to the other property owner(s) are settled. Sometimes loans are made to one part owner, only to have the other part owner contact the same broker to obtain their own loan against their interest in the property.

How else can partial ownership loans be used? How about investment or business partners who may own a share of a property and need to borrow when the other partners don't? Another situation occurs when one of several heirs lives in the property and the other non-occupying heirs don't want to encumber their share of the property to make improvements or upgrades. With a partial ownership loan, the occupying owner can borrow against their own share to obtain funds. There are other possible uses for this program primarily, it's a shift in thinking. Now, anytime you have a borrower who can't get the other owners to sign, you have a new alternative to offer.

What should you watch out for in brokering partial ownership loans? First, be careful about placing clients into a partial interest loan with a balloon payment. Be sure they understand that when the balloon payment becomes due and payable, they may not be able to get another loan to cover the payoff.

Next-use your mortgage planning skills. Help your borrowers look at the big picture. For example, what are their long term plans for the property and how does the loan they're considering impact those plans? Sometimes, just asking the right questions can guide the borrower to the best decision. [

Partial ownership loans yet another way to help your borrowers and provide solutions. Be sure you're prepared to discuss these with your clients. There's no question you'll run into situations where they'll be useful.

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