There are two loans available for TIC purchases, a group loan for
an entire building, or fractional loans for each individual unit in a building.
|Group loan advantages||Group loan disadvantages|
|Fractional loan advantages||Fractional loan disadvantages|
Group TIC Loans
With a group loan, all of the buyers of the property apply for a loan together. Conventional lenders will provide one loan on the entire property, with all buyers as co-borrowers. Although the buyers will be occupying separate units, they are jointly purchasing one property. The only group loans available for buildings with more than 4 units are multifamily loans; these loans may have higher closing costs, and may require a much higher down payment for a purchase than the conventional loans available for properties of 2-4 units.
TIC GROUP LOAN ISSUES:
- The primary disadvantage of having a group loan is the complications it presents when one or more of the TIC partners wish to sell their interest. A few lenders allow partial assumability of a TIC loan. This means that if one member of the group sells his or her interest, another party can assume that person’s interest in the loan for a fee. Ask your lender if a loan with partial assumability is available.
- Group TIC loans generally have more rigorous qualifications than individual condominium loans. They may require some combination of higher down payment, better credit, or higher income.
- Each member of the group is responsible for the loan payment. If the loan becomes delinquent because one borrower can’t make his or her payment, the credit of each member is negatively affected. That’s why it is important in a TIC with a group loan to know the credit score, job and income history, and overall financial strength of your partners.
- All borrowers qualify for the loan as a group. From the lender standpoint, income and assets of all the buyer/borrowers are pooled: the transaction is a single loan with one borrower, the group. The financial dynamics of the group are very important. For example, one borrower with a high income but very little down payment can compensate for another group member with a low income but substantial assets; the reverse is also true. Most lenders will use the lowest credit score in the group when pricing the loan.
- Without partial assumability, the partners may have to get a new loan whenever a partner sells, which can be expensive.
With a fractional loan each buyer of the property applies for a loan individually, through a single lender.
- With a fractional loan, each owner of the building qualifies for an individual loan based on individual qualifications.
- A fractional TIC loan allows the individual members of the group to have separate loans. These loans are secured by a deed of trust covering that individual’s percentage ownership interest in the entire building.
- If a member of the group defaults, the lender forecloses only on the share of the individual who defaulted. The credit of the other owners is not affected.
- Fractional loans have a substantially higher interest rate, less options, and higher closing costs. Group loans have many options not available for fractional loans, such as ‘no-points’, 30 year fixed terms, and interest-only payments.