Can homeowners renting to daughter get a better refinance rate?

Q: Our daughter lives in a home we have owned for 11 years. We want to refinance to a lower rate and have her make the payments. Our mortgage company has rejected a refinancing application at today’s residential rates on the grounds that the property is a rental. They have instead offered to reduce our rate from 4.85% to 4.175%. Can we do better? A: It might seem like the lender is being picky, but there’s actually some logic to the response you received. No less important, there are possible ways to get a better deal. Let’s start with the lender. “Technically,” explains Matt Hatch, a mortgage loan officer and team leader with First Midwest Bank, a Chicago-based lender active in several Midwest states, “the definition of a second home is one where the borrowers will occupy the property a portion of the year.” In your situation, you own the property and you are getting the loan. However, you don’t live there, plus your daughter is not on the deed. She is not a co-owner and she is not a co-borrower. While the lender might want to make the loan, it likely will have a difficult, if not impossible time selling the mortgage in the secondary market. But, the good news is this. It may still be possible to work something out. One choice is to look for “portfolio” lenders. These are lenders — usually banks — that originate mortgages and keep the debt. They do not have to conform to the secondary market’s requirements because the loan is not for sale. They can — and do — make up their own lending standards. Maybe your bank is one of them. A second option is to have your daughter on the loan as a coborrower. This might be generally acceptable to lenders because she will then be a “borrower” and she will live on the property. A third approach is to sell a portion of the property to your daughter, perhaps for “good consideration,” an expression which means love and affection. She will then be an owner, a borrower and a resident — the type of trifecta that lenders love. However, if you want to add your daughter’s name to the loan or make her a co-owner, do nothing until you first speak with an attorney in the jurisdiction of the property. What are the pros and cons of adding your daughter to the title? What happens if you have a fight — that’s not unknown in families? What if one owner wants to sell, but another doesn’t? What if the tenant — your daughter — doesn’t pay the rent? What if she’s sued? Do all owners have wills and appropriate medical directives? Etc. Lastly, mortgage rates have generally been headed down. Residential mortgages averaged just 3.15% in late May, according to Freddie Mac. That’s an average — some loan quotes are in the 2% range. You have decisions to make regarding how to structure the deal, but the way to get the best rate is to shop around and let lenders compete for your business.