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We found a home we would like to purchase (U.S.). It was the 2nd day on the market and there were already two other offers for it, so we decided to make a cash offer ($230K) as my dad agreed to pay for it while we figure out the financing.

Our offer was accepted and we are closing in 3 1/2 weeks, and so now I'm trying to figure out the best route for the financing.

More background: We own our first house, worth $120K-$140K, outright. but plan to rent it out rather than sell it. We have little money in cash for a down-payment. We have good credit.

Here are the potential options I'm considering at the moment:

  • Option 1: Sign the home over in his name. Make payments to him until we can figure out the mortgage, at which time we'll give him the remainder of the amount and buy the house from him. With this option, I'm worried about the double fees we'll pay for the two different sales, but don't know what those might be.

  • Option 2: Sign the home over in our name and take out a home equity loan. I checked with a local bank, and the policy was no home equity loans until 6 months after you buy the property*, plus another 1/8% on the interest rate. I'm not sure if this is common or just their policy, but I'd rather not make my dad wait that long before paying him back.

  • Option 3: ???

Any advice would be greatly appreciated!

Update (8/14/2014):
After looking at the possibilities and seeing the complexities and potential extra costs that having my dad pay with cash will bring, we decided to pursue a conventional mortgage in time for the closing. My dad will gift me the 20% down-payment and we will pay him back on a regular repayment schedule. The bank has approved the loan and says they will be able to get it done in time as the home has already passed inspection and only needs the appraisal.

The final question is whether the sellers will accept this amendment. I proposed that this should not introduce additional contingencies, as we could fall back to paying with cash if the financing fell through for some reason. This made sense to my realtor and the selling realtor, so hopefully it will make sense to the sellers as well and they'll accept the amendment.


*You can avoid the 6 months refinance delay after purchase if you document when you close that the source of the funds was not yourself, plus some other requirements. See section 24.6 of the Freddie Mac guide for complete details.

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Oh man, this is messy. If he owns the house, and you want to own it, you'll have to go through closing again, or acquire it through his will, but I suspect that's not a reasonable option here. If you own the house, but he pays for it, there are some massive tax implications for the gift. –  Noah Aug 12 at 14:33
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Is your dad intending to act as your mortgage lender for the whole period you own the house, or is he going to want his money back in a few months? –  DJClayworth Aug 12 at 15:43
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Why have you not considered a conventional mortgage instead of a HELOC? There are some fees that you may pay twice, but presumably that is a better option than letting this house go to one of the other bidders? –  Nathan L Aug 12 at 16:38
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@Briguy37: If you have little cash and aren't going to sell your current home, how are you planning to pay your dad back in a few months? –  BrenBarn Aug 12 at 19:02
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@BrenBarn I was hoping he would just provide intermediate financing to streamline the sale until we figured the financing out with a bank and paid him back with it. –  Briguy37 Aug 12 at 19:09

5 Answers 5

You are going to need a lawyer anyway so check with him.

But here is a path you might be able to go down.

Put the house in your name right from the get go. He gives you the money but you sign over a promissory note to him so that you net less than $14000 (gift tax annual exclusion for the calendar year).

He can gift everyone in your household 14k per year tax free and he could gift it to you and your partner in less than 7 years. You can pay him back in anyway you like or not at all as the promissory note could be reduced by 28k per year.

I think a CPA and lawyer in your state would be able to confirm that this would work for you.

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You have four basic options.

  1. Your father buys the house, and then when you have sorted out your finances, you buy it from him. You should probably agree on a timeframe and the price that you pay him, factoring in some compensation for the interest he didn't earn while his money was tied up in the house. The disadvantage of this approach is that you will end up paying some extra lawyers fees and transfer fees, and possibly some land transfer taxes or similar. The advantage is that nobody ever owes anyone any substantial amounts of money. Hoever you would need to make sure he is OK in the unlikely case that something happens that makes it impossible for you to ever get a mortgage (like suddenly getting very sick).
  2. Have your dad loan you the money. Make very sure you document the loan, and you might consider having a lawyer draw up the agreement. When you are able, take out a mortgage/home loan on the house and pay your Dad back. As above, include an allowance for the time his money wasn't earning interest for him. As above, you need to cover the case where you are never able to get a mortgage.
  3. Your Dad buys the house and then rents it to you. This would result in his not getting his money back any time soon, and you would need to agree who gets what amount of money back when the house is eventually sold (remembering that house prices can go down as well as up).
  4. Buy it together. Put both names on the title deed, and draw up a separate agreement about who owns what fraction and what money is to be paid in the event of sale, and similar matters. That agreement is such that you would need a lawyer to draw it up, but you can then effectively transfer the house by redrafting the sharing agreement (you might have to leave some nominal fraction of it in your father's possession). Specific rules probably apply to this kind of agreement, and you should check with a lawyer how to do it and if it's even possible in your jurisdiction.
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Option 2 seems the sanest. You'd approach a bank with the intent to refinance, not with the intent of taking out a home equity loan. –  MSalters Aug 12 at 19:16
    
Agree with @MSalters, except for the DJ's use of "loan" as a verb. A home-equity loan is a second mortgage, and the bank will approve and price that loan as if the OP's father would remain (in theory, which is all that matters to the underwriters) a lien-holder. If you do a re-fi, your father will be paid off as part of the closing process; and the bank would become the primary mortgager. (OP must make the loan explicitly a mortgage, not a personal loan, in order to deduct the interest.) –  Malvolio Aug 12 at 19:46
    
@Malvolio: There are other types of loans besides mortgages and personal loans, but the basic idea is indeed that the deduction can only be claimed by Secured Debt, secured by your primary residence. –  MSalters Aug 12 at 20:44
    
@MSalters, hey, if we are going to get technical, interest on debt secured by your primary or secondary residence can be deducted. See Pub 936 for the gruesome details. I'm curious what the requirement that the debt be "recorded or is otherwise perfected under any state or local law that applies" actually means. Does Dad actually have to file a lien against the home before Junior can deduct it? –  Malvolio Aug 12 at 22:04

we have little money in cash for a down-payment

This is a red flag to me. If you have little money in cash for a down-payment, how are you supposed to be a landlord too?

You could try is to do a lease to own from your Dad. Get a renter into the other home for at least a year or more and then close on the house once your financial situation improves. You still have the same problem of being a landlord.

Another option is to receive a gift letter from your Dad since he is gifting the money on the home. It might extend your closing a little bit so you can get an appraisal done and loan application. This to me is the most sane option.

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"I suspect it is because you are upside down on the house." They own the house outright, so presumably they don't owe anything at all. –  philipthegreat Aug 12 at 16:24
    
OP either believes the market will go up (this is why I held on to a property that I owned outright and rented for 2 1/2 years before selling it) or the OP likes the idea of residual income and doesn't have any definite plans to sell. –  Nathan L Aug 12 at 16:35
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The main reason for renting over selling is that the rental income is higher than the mortgage savings. Looking at similar rentals in the area we'd get about $1250/month. Payments for a 30 year $140k loan at 4% would be $668/month, for a difference of $582. Figure in repairs ($150/month) + taxes ($100/month) + insurance ($50/month), and that brings the difference to $277/month in favor of renting. However, each month of the year it is empty would take $105/month off that, so 2 months empty would still be a net profit ($67), but 3 months would be a loss ($38/month) over selling. –  Briguy37 Aug 12 at 18:22
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@staticx Yes, in my comment I was just considering that if I sold it, then it would essentially be $140k (at most) off the mortgage of the other house. –  Briguy37 Aug 12 at 18:55
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@Briguy37: Yes, it's called seasoning. However, you just need documentation for the last 60 days, not that it needs to be in there for at least 60 days. I would talk with another mortgage broker. See here : www.quickenloans.com/blog/gift-money-down-payment –  staticx Aug 12 at 19:24

Presumably this house is a great deal for you for some reason if you are willing to go to great lengths such as these to acquire it.

I suggest you have your father purchase the house with cash, then you purchase the house from him. You might want to discuss this with the title company, it's possible that there are some fees that they will waive if you close both sales through them in a short period of time.

If the home will appraise for a higher amount than purchase, then you may be able to get a mortgage without a significant down-payment. If not, then you will need to owe your father at least the amount of the down-payment at closing time.

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Not just the title fee. Won't most jurisdictions have transfer taxes, filing fees, and so on? This seems an extraordinarily expensive way to do what the OP wants. –  Malvolio Aug 12 at 19:42
    
With multiple competing bids it is clear that the OP desires this property greatly, and that someone thinks a "cash" offer is sufficient to give them an edge in the bidding. In my state, this would amount to a few hundred dollars extra. Whatever the case in the OP's state, it may still be cheaper than raising the offer several thousand dollars. –  Nathan L Aug 12 at 20:08

There are quite some options, but without additional information, I can only provide examples.

Last year I had the option to buy a house, but I decided against it because in my area it is getting harder and harder every year to sell it at a reasonable price.

But if I had bought a house, my mother would have lent me the money, with me paying it back to her over the years on 3% interest. So it would have been some kind of a private loan. But my mom would never have taken ownership of the house, since it was not her intention to own it in any way. (Does your dad intend to own the house and rent it to you? If yes, and if you are comfortable with renting instead of buying, then this is an option.)

The second option, the one we discarded because of the additional cost, is that I could have taken a loan, paying 4.5% interest to the bank, which would then pay under 1% to my mom, and keep the rest.
Banks always want to make profit, and this profit has to come from somewhere - from the difference between the interest rates. If your dad has 230k on the bank, and you owe 230k to the bank, you are better off if you keep the bank out - at least as long as your dad is comfortable with lending you money, and you are comfortable with owing him money.
(my gf would never borough money from her mother, because her mother would always play the "you are in my debt" card - on each and every visit, and whenever she needed help in any way...)

So the key is: What does your dad feel comfy with - and what do you feel comfy with. If possible, keep the banks out, but set up a written contract between you and your dad.

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