You’re ready to buy a house, but you’re buying it with other people. Can you all put your names on the mortgage? This question doesn’t have an easy answer.
There’s no legal limit as to how many names can be on a single home loan. But getting a bank to accept a loan with multiple borrowers might be challenging.
What the government allows
It’s important to know that about 90 percent of mortgages in the United States are backed by the government via Fannie Mae, Freddie Mac and Ginnie Mae.
Fannie Mae uses an automatic underwriting tool called “Desktop Underwriter.” This is what most big banks use to approve or deny loans. Lenders plug in your information, which is processed and analyzed by Desktop Underwriter, to get a determination of your eligibility.
According to Fannie Mae, Desktop Underwriter only supports four borrowers. If there are more than four people on the loan, that would mean a manually underwritten mortgage.
Manual underwriting will narrow your options since many big banks don’t usually manually underwrite loans. Borrowers who need to go outside of the norm typically look to credit unions and community banks.
Although Fannie Mae doesn’t limit the number of names on one note, they do require that all borrowers submit their credit scores, income information and employment history for assessment in the underwriting process.
“Quicken Loans allows a maximum of four clients on any single loan transaction. The exception to that rule is VA loans. National VA loan guidelines permit only the veteran and his or her spouse to be on the mortgage,” says Bill Banfield, executive vice president of Capital Markets at Quicken Loans.
“When applying for a loan with multiple individuals, it is advisable to speak with a real estate attorney who can help navigate the different requirements and specific state laws in each situation,” he adds.
Get legal advice
It’s wise to protect yourself before you agree to a mortgage with other people. The best way to do that is to speak with a real estate or business attorney who can explain your options and outline the risks you face.
“First, contact an attorney to work out what type of entity is going to take title to the property. This could be an LLC, a corporation, a trust, or a partnership. Once you decide what would work best for your particular situation, then the attorney can draft the legal documents,” says Jim Finn, an attorney at Clark, Hunt, Ahern & Embry in Cambridge, Massachusetts.
If you’re going in on an investment property with a few friends or family members, forming an LLC can protect members from liability if there’s a dispute, lawsuit, someone stops paying the mortgage or wants to sell the property.
“If it’s an investment, I would suggest they do an LLC because that’s going to give them insulation from personal liability,” says Finn. “They would have an operating agreement which would spell out how they’re going to split proceeds and share costs.”
Before you form an LLC, however, make sure your lender is open to giving mortgages to LLCs or similar entities, says Finn.
“Some lenders do not want trusts or LLCs to be on the mortgage; they want individuals. The first step would be to determine how they want to hold title. The next step would be going to a lender to make sure that’s acceptable,” Finn says.