Need help…lease-back or extend escrow? Pros & cons? Other options?

[bowie]

Hi! I’ve been a lurker on this site for over 8 years & have learned a lot. We’ve lived in San Diego for almost 9 years but have gotten tired of renting and we haven’t been able to find the right home in the right school system at the right price so we are moving to Denver. We have a contract to purchase a house there with a jumbo loan. We have 3 children & want them to finish the school year in their current school. The sellers in Denver are teachers & also have school-age children, so we’re renting back to them until the end of the school year (May 31) as it is mutually beneficial. We are scheduled to close in mid-Dec.

We were just informed by our loan officer that we cannot have a rent-back of longer than 60 days or the property will be considered a rental unit instead of our primary residence (and interest rates for a investment property are higher). We rent the house we are living in now so we would not have two mortgages for two primary residences.

I understand banks need to protect themselves from people trying to get away with loans that aren’t intended for rental properties & second homes, but we have been very upfront about the situation & all parties benefit & are agreeable. We hate to let this contact fall through as we really like the house.

So now we have some decisions to make and I have lots of questions.

Is it possible to extend escrow for 3-5 months? What are the drawbacks? Benefits? (BTW, the sellers would actually save money if we closed in March/April/May as their mortgage is less than what we agreed upon for rent).

Is it ever possible to get an exception on a 60 day limit for a lease-back?

We don’t want to move earlier than June, so that’s not an option.

Am I missing anything?

Thanks in advance!

[spdrun]

What the bank doesn’t know can’t hurt it. Why did you even mention this? You intend to move into the residence as a primary, end of story. What you do after closing is not their damn business.

Some people are way too eager to disclose the whole story to a big corporation which likely won’t give them the same level of honesty.

Other option is to get a loan as an investment property, then refi into a primary mortgage in May.

Lastly, 60 days will take you almost through February. You might consider having trouble evicting them for a few months 😉

[bowie]

We will not knowingly commit mortgage fraud. Our lease-back agreement is in the contract, but even if we take it out and have a separate agreement outside of the purchase contract, we still have to have the proper insurance while we are leasing back, and of course the lender has access to all the insurance information. We want this all to be on the up & up. I realize big companies may not reciprocate, but it doesn’t mean we need to stoop to that level. And I don’t want to get the sellers in any trouble as they seem like good people too.

[spdrun]

You’ve given the thieves at the bank way too much information already, so it might be too late. You’re not buying this as an investment, but with actual intent to occupy.

But, a jumbo loan is not Federally guaranteed, so somewhat more flexible. Can you get the bank to give you say 120 days of leaseback, push closing to late January, which would give you till almost May?

[XBoxBoy]

[quote=bowie]We will not knowingly commit mortgage fraud. [/quote]

Well that’s a pleasant surprise! Good for you!.

If you can convince the sellers to extend the escrow then that’s probably the easiest/best thing. And if the sellers think you are serious about going through with the purchase it seems to me they would not be adverse to that.

Biggest obstacle I would expect to this is seller’s agent who probably wants the deal to close so they can get their commission. But having the deal fall through is not attractive to the seller’s agent either.

You can try to get an exception from the loan company, but I think that will be very hard to get.

I think your strategy should be to go to your agent and make two things very clear:
1) You do want to buy the house, you do not want to have the deal fall through.
2) You will have to let the deal fall through if a solution is not found.

Since your agent will get no commission if the deal falls through, they should now be very motivated to find a solution. This is the kind of problem they need to solve to earn their commission.

Keep in mind here, if the sale falls through no one gets a commission and the sellers don’t sell the house. That’s not good for anyone. Toss the ball back in their court with the understanding that you are very interested in finding a solution but either the bank (unlikely) or the seller (much more likely) needs to work with you on this.

Hope this helps,

XBoxBoy

[livinincali]

I guess the questions to ask yourself is how much would it cost to finance the property as an investment and then refi it in a year as a primary and can you qualify for the property as an investment. If you really like the house and those additional costs don’t add up to too much money maybe it’s worth it to just buy it as an investment property.

[spdrun]

The real question is, what can the bank do to you if you legitimately intend to occupy the property and leaseback exceeds 60 days?
(1) Zero likelihood of jail/prosecution, would be really bad publicity, and would make default much more likely. Not what they need right now.
(2) Calling back the loan would be unlikely, banks do not want to foreclose (and have bigger fish to fry right now).
(3) Some sort of warning letter? By which time, the home would be a primary anyway and the violation would be cured.
(4) I suppose they could do a FinCen report and make it harder to get a loan down the line.

[bowie]

Thanks for all your comments. We told our realtor that we could close as planned in December if we can figure this out. The sellers said they would move out 59 days later rather than May 31st. But that still gives us 3.5 months (about $16,500) that we’d need to cover before we can move in. So we’re at a stalemate.

The house was shown a lot, it went under contract in less than 6 weeks and when it fell out the first time, we snapped it up within 2 weeks of it being back on the market. There were (supposedly) two other offers coming in when we presented ours. The sellers are not in a hurry to leave but also are ready to sell.

What am I missing? Any suggestions?

[XBoxBoy]

Bowie, the thing I’m wondering is who is opposed to simply moving the close date to late March? That way the sellers don’t need to move out until late May and the loan company should be happy.

If you fall out of escrow there’s a good chance that the sellers won’t get back under contract during the holiday season.

So, I keep coming back to the question, why the pressure to close? Who is benefiting from that? The sellers don’t want to move until May 31st, right? Do they have some other reason they need to close and do a rent back for five months? Is it the real estate agents who are pushing to have this close?

[HLS]

You folks don’t seem to understand that ‘banks’ are mortgage brokers.
They don’t lend their money for 30 years.
‘Banks’ don’t make the rules. Fannie/Freddie/FHA/VA make the rules and some guidelines are simply idiotic. I’ve rarely seen exceptions.

Taking fresh baked cookies to the loan officer or manager at the bank isn’t going to get an exception.

Standard guidelines are that the CONTRACT cannot state more than 60 days before buyer takes possession OR it’s a rental property.

You aren’t going to get a lock extension until March. Rates have moved up significantly in the last week and are not likely to go back down.

As stated above, the parties involved should be able to figure this out (cough!)
I know I could.

[spdrun]

The OP said “jumbo loan” which implies that it is not GSE-backed.

[Doofrat]

[quote=bowie]The sellers are not in a hurry to leave but also are ready to sell.

[/quote]

This doesn’t make sense to me.

Are they trying to sell the place so they’ll have the equity available to buy a new place prior to the end of the school year? What if they don’t find a new place in 59 days (remember that January and February aren’t hot real estate months), or they change their mind about moving and just decide to keep renting from you whether you like it or not?
Why did the house fall out of escrow the first time?

[HLS]

[quote=spdrun]The OP said “jumbo loan” which implies that it is not GSE-backed.[/quote]

‘Banks’ rarely write their own guidelines for jumbos.
They use the guidelines for conforming loans.
Reserves are rarely needed for GSE loans, but often required for TRUE Jumbo. There are additional overlays.

Depending on credit score and the % of down payment,even getting a loan as investment property
may not even be an option.

There is way too much risk on the back end.
FNMA guidelines are in the range of 1300 pages.
Why would any institution decide on their own when the others are public information.

Unless one has a source of funds for 30yr money,
it’s crazy to lend money for 30yrs and only have
5yr CD’s. Pure insanity.
Very few institutions offer anything longer than a 10yr CD for deposits.
30yr bonds are trading at 3.11% today, approaching a 52 week high of 3.25%

[bowie]

We were concerned about the rising interest rates, as we were able to lock just before the rates started to rise. So pushing the closing out could have cost us more. The sellers are flexible – they are ok staying through May but also can move earlier. We were ok with closing in Dec., but needed to cover our expenses until we move there in June. The sellers leasing back would have covered that.

So after a lot of thinking, we decided the best bet would be to close in Dec as planned & have the sellers lease back for 59 days. Since no one else had a solution, we suggested to our realtor that the 4 parties all equally split the costs for the remaining 3.5 months. We got a lot of push-back from the listing realtor as she had already accepted a reduced commission, but she eventually agreed to contribute. Her portion is significantly smaller than anyone else’s. The seller is basically paying 20% and our realtor is paying about $2000 less than we are. So it’s not ideal as we’re having to contribute about $2000 more than we’d anticipated, but we didn’t want the deal to fall apart over that. Our realtor is already covering most of it for the listing realtor. When it was down to us paying $4000 more than everyone else, we were ready to walk away. It’s amazing how a $1.2 million dollar deal can fall apart over a few thousand dollars, but it almost happened.

It was a pretty crazy few days trying to put this together. My realtor did come through in the end, but we got the distinct impression that he was advocating for the sellers & even more so, the seller’s agent during these negotiations. We did not feel as though our interests were being represented. It was very frustrating as up until then, he had been doing a good job. Now we are past that & hoping that we can close as planned in Dec.

Thanks all for your suggestions! I have another question but will start a new thread as it’s about a different subject.

[spdrun]

Hypothetically one could “have trouble evicting” the old owners after 59 days if anyone asks 😉 By the time the “eviction” is done, the school year will be over…

But no one will ask if the payments are being made on time. Stop treating large corporations any better than they’d treat their customers.

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