Mortgage information help needed!

[Yooper]

I feel kind of silly, but I know NOTHING about mortgages or title insurance even at my advanced age.

My daughter found a cheap house and it's solid. She is young, and has no credit. Her fiance is older, but with some old student loans and his credit has suffered. We can afford to loan them the money for the house, but we want to make sure that we can put our name as "mortgagors" as if we were a bank. We're only doing a 5 year loan at 2% interest.

We do not want to use an attorney for this, if we don't have to. Can we be placed as the mortgagors on the deed, or how does this work?

They are going through a real estate agent, with standard "home inspection" clauses and the like. I'm just wondering how to loan them the money, but still protect ourselves just in case.

 

[Hermit]

I feel kind of silly, but I know NOTHING about mortgages or title insurance even at my advanced age.

My daughter found a cheap house and it's solid. She is young, and has no credit. Her fiance is older, but with some old student loans and his credit has suffered. We can afford to loan them the money for the house, but we want to make sure that we can put our name as "mortgagors" as if we were a bank. We're only doing a 5 year loan at 2% interest.

We do not want to use an attorney for this, if we don't have to. Can we be placed as the mortgagors on the deed, or how does this work?

They are going through a real estate agent, with standard "home inspection" clauses and the like. I'm just wondering how to loan them the money, but still protect ourselves just in case.

I think you can put a lien on the property. I'd google that up and see. You can probably also use google to find some legally solid loan papers that you could have them sign with notary. Good luck. I might be going through something similar to this myself so I've been thinking about it, but not close enough to do the searches yet.

PS. Just call you bank. They might be able to answer these questions pretty straight forward.

 

[dogtailale]

Wish I could help you out.
I got some Ideas but every state has a different set of rules.

Only advice is I can give is pick the agents brain yourself & See realastate attorney.

Best luck

 

[Yooper]

Thanks!

Real estate prices are crazy low right now, especially for what they need as a starter house. They want to make an offer by tomorrow, because there is already an offer on that house that hasn't been accepted yet.

 

[MyNameIsPaul]

Yooper, Do you ever catch the Dave Ramsey show in your area? I listen almost everyday since I travel a lot and AM talk radio is a lot more entertaining....anyways.... Dave would tell tell you to NOT loan the money. It's a relationship time bomb just ticking away. He's got pretty sound and proven advice, so your mileage may vary, but I definitely recommend taking a listen to him on podcasts or live shows, as this question pops up a lot.

 

[mattjmac]

Be careful and mind the IRS. If you loan them the money at anything other than market-rate the IRS will deem the difference in interest payment between your 2% and the market-rate to be a gift from you to your daughter each month. If this difference exceeds the annual gift exclusion you will be responsible for filing a gift tax return each year and either paying the gift tax or using up some of your lifetime estate/gift tax exemption amount.

Also, be aware that you will need to report the 2% interest payments each year as income on your tax return. I'm not 100% sure, but I believe there is also a mortgage interest reporting return you'll need to file each year. This enables the IRS to match the interest you pick up as income with the interest your daughter will pick up as a deduction.

If your daughter really wants this house, ask her to pay for the attorney/accountant to set this up the right way. A little money spent now could save you a lot of money down the road.

 

[the_bird]

I think I'd spend the money to get a lawyer to draft this up properly.

Don't see how the the difference between the 2% rate and the "market rate" would be in excess of the annual gift tax exclusion. NArket rate for a five-year fixed mortgage... well, there aren't a lot of them out there, but figure that 5/1 ARMS in MI run 3.25% - 3.50%, that's a decent proxy. Ten-year fixed is averaging ~3.75%. Even if you figure it's a 3% difference on a $100k house (assuming from where you live, that's ballpark for a starter home), it's only $3k annually before considering the principal being amortized. Shouldn't be getting anywhere close to the gift tax exclusion amount.

I'd pretty certain that you CAN do what you want to do... but a decent lawyer will help you do it. Have her pay for it, or roll it into the mortgage if necessary. IRS is probably going to be most concerned that this IS a mortgage, not a gift - that would cause complications. IRS is also going to be concerned that you're reporting the income (and your daughter wants to be able to deduct the interest). Imagine you might have to prep a tax form for her at the end of the year to show the amount of interest she paid you.

Enough complicating factors to justify paying for a lawyer. They don't *all* suck.

 

[doctorRobert]

some states require a lawyer for real estate transactions, so you might have to get one anyway.

The IRS can almost never track the gift tax. Open up a joint banking account with the person who you wish the loan the money too. It'll be easy to move the money to the other party this way. This is risky as in there is no paper trail and you'll have no legal recourse of the loan, but if its family, then hey, i wouldnt sue my own family. I wouldnt lend to most of them either.

 

[Yooper]

Michigan doesn't require a lawyer for real estate transactions. I've bought three houses, but never had a mortgage or had to wade through any legal issues. I just had the seller do the title search, pay the $$$ and then register the deed with the county. Maybe not the wisest way, but we currently own two homes and have never had a problem.

I KNOW that loaning money to a daughter is a bad idea. But we can loan them $12,000 and it can be less for them than rent. The payment, with a 2% interest rate, would be $210/month for 5 years.

We also talked about buying the house ourselves, and just having them "rent to own" but I think that would be more complicated tax-wise and legally.

We could also just give them a promissary note for $12,000 but then if they break up (there is a 50% divorce rate in the US), we wouldn't have much recourse. Holding the mortgage means that if they defaulted, or if we had a big problem, at least we'd have some recourse to recoup some of the loss.

We definitely don't have $12,000 to give away. But we could get by without it and not go hungry.

 

[sgt_rosenfield]

this is why I love forums, a vast collection of knowledge willing to help other like minded (hobby enthusiasts) it's like a family... sorry I don't know anything about mortgages

 

[the_bird]

Wait, the total loan is only $12k? Probably wouldn't hire a lawyer.

You know what *might* make sense instead? Since the worry is what happens if they split up... have the house put in your daughter's name individually until the loan's paid off. They can retitle it later. I'd just lend them the money, tell them to not deduct the interest (hardly worth bothering with) and not report it myself, either. But, keep it in your daughter's name solely, limit the chance that you get screwed if they split.

Just a thought. Ain't a lawyer.

 

[doctorRobert]

Well 12k you wont have to worry about gift taxes. Just have both people sign the loan, I'd get loan documents on line, you might have to pay for them, but one of those online legal places should have them. (like legalzoom.com)

When they get their mortgage, it's up to them to report to their title company and first mortgage company to report your loan. They could lie, and you can't really report it to a credit reporting agencies, so the 1st mortgage company might not find out, which would keep their rate lower.

But honestly, forget all that non-sense and technical details. If you're comfortable making the loan, just have official docs in case the **** hits the fan, and go for it. It's a low enough amount that there won't be a gift tax, and the 1st mortgage shouldnt have an issue with it.

 

[Yooper]

Wait, the total loan is only $12k? Probably wouldn't hire a lawyer.

You know what *might* make sense instead? Since the worry is what happens if they split up... have the house put in your daughter's name individually until the loan's paid off. They can retitle it later. I'd just lend them the money, tell them to not deduct the interest (hardly worth bothering with) and not report it myself, either. But, keep it in your daughter's name solely, limit the chance that you get screwed if they split.

Just a thought. Ain't a lawyer.

Good idea.

Yeah, housing prices are crazy cheap. I knew the former owner, and she was foreclosed on two years ago. She owed $31,000 on this house, she told me last week.

There has been a cash offer on this house already (not yet accepted), probably by a local slum lord. We were talking about bidding $8500, but assume that we'll now have to go to $11,000 or $11,500 to get it accepted. The key here would be that it's another "cash" deal- no need to secure financing. Cash deals go fast, and cheap. At least here. She was talking about bidding and then putting in the contract "upon securing financing" but working with cash makes the company holding these foreclosed properties grin. We assume that if it's not a cash offer or at least a guaranteed funding, they won't get this house.

This is why I hate to have to get a lawyer. They want to have an offer on the table, along with the first offer, by Tuesday morning's opening business. Secondly, we're talking about $12,000. Not a ton of money but still more than pocket change!

 

[the_bird]

Where the hell is this house? Former crack houses and meth labs are decidedly sub-optimal for raising a newborn!

 

[Yooper]

Where the hell is this house? Former crack houses and meth labs are decidedly sub-optimal for raising a newborn!

Well, darn!

Seriously, "in town" houses are crazy cheap here, especially now. When I bought this house (an enormous five bedroom, 2+ bathroom house in great shape) in 2001, I paid $54,000. I sold my smaller bungalow (in perfect condition) for $27,000.

Since then, the real estate values have tumbled here, as in many places. This house is one of about 200 for sale in an area of about 5,000 permanent year round residents. This house probably sold for $45,000 eight to ten years ago, and was foreclosed on two years ago. There are piles and piles of houses in the 22,500-40,000 range but this one is a real bargain. They were asking 19,500 last week, and came down to asking $14,900 by Friday.

We have severe winters, and we're already heading into furnace season (it was 38 degrees last night), and they are trying to move houses before the winter sets in.

The lake homes have pretty much maintained their value, although I'm sure our lake house would sell for a bit less than we paid for it in 2007. It's funny- there is still a market for homes in the $125,000-250,000 range because of the lakes and acreage.

We had a boom about 8 years ago, when people in the cities found that they could sell their house in Chicago for $500,000+ and buy a 5 bedroom place on a lake for $250,000. Even the houses in town were scarfed up by bargain hunters, and flipped for a profit.

Once the job market here worsened, you almost couldn't give away a house in town. There are lots of vacant homes, and some of them are pretty nice.

 

[Cheeto]

Well, darn!

Seriously, "in town" houses are crazy cheap here, especially now. When I bought this house (an enormous five bedroom, 2+ bathroom house in great shape) in 2001, I paid $54,000. I sold my smaller bungalow (in perfect condition) for $27,000.

Since then, the real estate values have tumbled here, as in many places. This house is one of about 200 for sale in an area of about 5,000 permanent year round residents. This house probably sold for $45,000 eight to ten years ago, and was foreclosed on two years ago. There are piles and piles of houses in the 22,500-40,000 range but this one is a real bargain. They were asking 19,500 last week, and came down to asking $14,900 by Friday.

We have severe winters, and we're already heading into furnace season (it was 38 degrees last night), and they are trying to move houses before the winter sets in.

The lake homes have pretty much maintained their value, although I'm sure our lake house would sell for a bit less than we paid for it in 2007. It's funny- there is still a market for homes in the $125,000-250,000 range because of the lakes and acreage.

We had a boom about 8 years ago, when people in the cities found that they could sell their house in Chicago for $500,000+ and buy a 5 bedroom place on a lake for $250,000. Even the houses in town were scarfed up by bargain hunters, and flipped for a profit.

Once the job market here worsened, you almost couldn't give away a house in town. There are lots of vacant homes, and some of them are pretty nice.

holy heck I think I might have to come out there and buy a summer house!

 

[Yooper]

holy heck I think I might have to come out there and buy a summer house!

Well, summer houses are awesome. It's the winter here that sucks balls.

 

[Cheeto]

I'll live out west for my winter,

I was thinking of a place to take the family and hide for a week or two every year

 

[Yooper]

I'll live out west for my winter,

I was thinking of a place to take the family and hide for a week or two every year

You're always welcome to come for a visit, and stay at our lake cottage for a week or two to see how you like it.

 

[Cheeto]

Thanks Yoop,

I will try to twist my wife's arm next summer,

I am thinking some time in Aug

 

[Yooper]

Thanks Yoop,

I will try to twist my wife's arm next summer,

I am thinking some time in Aug

You're always welcome, and summers here are wonderful.

 

[cracked1]

Coming from the title insurance industry I am not about to give any "legal advice". But, my friendly advice follows what others have already said... Have a real estate attorney draw up all the documents and most definately have a title search done and a "lenders policy" issued at closing. I know you are under time constraints but if you don't already have one I would look into getting a preliminary title report done before the offer is given. That way you know what you're getting into before hand. Don't want any liens, etc. to show up after the fact. When dealing with foreclosed properties the prior owners often have other financial problems that can come up. One example would be a Federal tax lien against the prior owner's name... The feds can come back and claim an interest in the property for 120 days after the prior owner was foreclosed on. If there is any possible equity in the property they may go after it.

Again, just friendly advice... See an attorney. And not just any attorney! An actual real estate attorney.

 

[KCBrewer]

You could also do a contract for deed. That would keep it in your name until paid for.

 

[kappclark]

I think I'd spend the money to get a lawyer to draft this up properly.

Don't see how the the difference between the 2% rate and the "market rate" would be in excess of the annual gift tax exclusion. NArket rate for a five-year fixed mortgage... well, there aren't a lot of them out there, but figure that 5/1 ARMS in MI run 3.25% - 3.50%, that's a decent proxy. Ten-year fixed is averaging ~3.75%. Even if you figure it's a 3% difference on a $100k house (assuming from where you live, that's ballpark for a starter home), it's only $3k annually before considering the principal being amortized. Shouldn't be getting anywhere close to the gift tax exclusion amount.

I'd pretty certain that you CAN do what you want to do... but a decent lawyer will help you do it. Have her pay for it, or roll it into the mortgage if necessary. IRS is probably going to be most concerned that this IS a mortgage, not a gift - that would cause complications. IRS is also going to be concerned that you're reporting the income (and your daughter wants to be able to deduct the interest). Imagine you might have to prep a tax form for her at the end of the year to show the amount of interest she paid you.

Enough complicating factors to justify paying for a lawyer. They don't *all* suck.

PLEASE get a lawyer ! I made the mistake of loaning a relative a tidy sum, no lawyer,but now legal mistakes are hampering any repayment...

 

[tedpeer]

I don't know Yoop. Sounds like you buy the house, and sell it to her (not them) under contract. She makes monthly payments to you...

 

[bob1852]

Not to be a debbie-downer, but part of the reason the real estate market is in the shape that it is, is because of situations like this.

However, now you're playing the role of the "bank." Go back to the boom in 2003-2005; banks were giving away money with odd ball deals because "interest rates were low, house prices were low and soon to skyrocket," etc. etc.

I hate to sound blunt, but I will be; if your daughter and finance can't get qualified for a loan on their, they're probably better off renting until their finances are a little better off.

Just being honest as someone who's now stuck with a townhouse worth 40% of what I bought it for in 2003, with a big interest rate because the banks didn't really care about my credit score, income, or debts.....

Especially with family; in my opinion, you don't want to be the "bank."

 

[doctorRobert]

The lawyer will charge the same amount regardless of the size of the loan (for the most part), so it's hardly worth it on that size of loan.

 

[Cheeto]

Here is what I would do for any of my children,

I would buy the house myself. then sell it to them on a simple interest loan ( like a car loan) for the amount that I paid for the place plus a modest interest rate(1-3%).

I would have a lawyer draw up all of the paperwork! As with everything in this world paperwork is everything...

You will get a very small return on your investment, I know that you are not in this for that.

You and your daughter will both be protected this way. I know that it seems a bit extreme but in the end all of you will be happy knowing that there is nothing to to dispute the ownership of that house.



I hope this helps Yooper.

I spent the last few hours reading about this, only because my oldest is a few years away from being an adult....

 

[Bedlam]

It doesn't have to be this complicated. Yoop, why don't you do a promisary note for the $12k, using the house as collateral? Do it as a secured loan. If they did default then you'd have the house and not lose your ass. Would also grant you greater protection if they did split up.

Second choice would be to hold the title in your own name and transfer when the loan is paid.

Not sure about Meeeechigan, but many states have common law clauses and homestead act stuff that could make putting the house in your daughter's name problematic if they split up. He could take her for a ride if things get ugly.

K.I.S.S. is my guiding philosophy for life. In more ways than one.

 

[homebeerbrewer]

Yoop, I'd say just buy the house and let them rent-to-own. You had mentioned that you don't want to do that, but, since she's your daughter, and will be even if they split up, she'll still have a place to call home if they do. You could set the "rent" at the $210 you mentioned, and after 5 years you'll have your money back, and they (or she) can have the house free and clear.

 

[Yooper]

It doesn't have to be this complicated. Yoop, why don't you do a promisary note for the $12k, using the house as collateral? Do it as a secured loan. If they did default then you'd have the house and not lose your ass. Would also grant you greater protection if they did split up.

Second choice would be to hold the title in your own name and transfer when the loan is paid.

Not sure about Meeeechigan, but many states have common law clauses and homestead act stuff that could make putting the house in your daughter's name problematic if they split up. He could take her for a ride if things get ugly.

K.I.S.S. is my guiding philosophy for life. In more ways than one.

This is the way we're leaning- a loan agreement for $12,000, using the house as the secured interest. They can't deduct mortgage interest, but at 2%, they couldn't anyway. It's a total of $600 over the five years. We can claim the interest as income, approximately $10 per month.

I know that everything you guys said is true- it's a bad idea to loan money to a family member, if they can't qualify for a loan on their own we shouldn't be the "bank", etc. But....I'm a mom and my grandson lives in an upstairs apartment where they pay $475/month. This house is actually cheaper for them. We've lent them very small sums before ($500) which they've paid back timely. With my daughter in school full time, I don't see them able to buy a house for many many years without a deal like this.

 

[BroadStreetBrewery]

Her fiance is older, but with some old student loans and his credit has suffered.

Credit does not suffer from old student loans, trust me. He has probably had credit issues (late payments, collections, etc) in the past. Regardless, both of them should really work on improving their credit. A $12,000 mortgage should not be too hard to obtain. Yes it may be a higher interest rate, but it is a great way to start increasing credit score. Your daughter may be young, but I would bet that if she has ever had a credit card or any loan she has decent enough credit to obtain a loan.

A lot of things have changed and they may not be able to qualify. If that is the case (don't assume, make sure they apply) then I would buy the house and have them pay you "rent" or get a lawyer as stated above. The lawyer is the best bet, find one that is involved with business/estate/finance. It will probably save you a decent amount on taxes, because you know the government wants their cut.

 

[Yooper]

Credit does not suffer from old student loans, trust me. He has probably had credit issues (late payments, collections, etc) in the past. Regardless, both of them should really work on improving their credit. A $12,000 mortgage should not be too hard to obtain. Yes it may be a higher interest rate, but it is a great way to start increasing credit score. Your daughter may be young, but I would bet that if she has ever had a credit card or any loan she has decent enough credit to obtain a loan.

A lot of things have changed and they may not be able to qualify. If that is the case (don't assume, make sure they apply) then I would buy the house and have them pay you "rent" or get a lawyer as stated above. The lawyer is the best bet, find one that is involved with business/estate/finance. It will probably save you a decent amount on taxes, because you know the government wants their cut.

Well, he had defaulted on his student loans about 5 years ago. He's rebuilding his credit, through paying his cellphone, the student loans and other things on time but it's definitely suffered. My daughter has never had a credit card, or any sort of loan.

$12,000 is not chump change, but it's less than a year of college that I paid for last year and the year before!

 

[BroadStreetBrewery]

$12,000 is not chump change, but it's less than a year of college that I paid for last year and the year before!

Are you adopting?

 

[Pappers_]

$12K for a house? That is less than a year's rent here for most smallish apartments . . .

 

[the_bird]

Just thinking out loud here, but if your daughter could borrow the money from a bank (with you co-signing the loan)... you wouldn't have to front the cash, would only be out if she defaulted (basically the same situation you're in now, you'd end up buying the house), she's start building up a credit history. Interest cost would be more, but given the size of the loan it might be worth paying some more interest for her to have a credit history built up.

 

[KCBrewer]

Contract for Deed

You can even get the legal forms to do it yourself online. You may try http://www.legalzoom.com

 

[Yooper]

Coming from the title insurance industry I am not about to give any "legal advice". But, my friendly advice follows what others have already said... Have a real estate attorney draw up all the documents and most definately have a title search done and a "lenders policy" issued at closing. I know you are under time constraints but if you don't already have one I would look into getting a preliminary title report done before the offer is given. That way you know what you're getting into before hand. Don't want any liens, etc. to show up after the fact. When dealing with foreclosed properties the prior owners often have other financial problems that can come up. One example would be a Federal tax lien against the prior owner's name... The feds can come back and claim an interest in the property for 120 days after the prior owner was foreclosed on. If there is any possible equity in the property they may go after it.

Again, just friendly advice... See an attorney. And not just any attorney! An actual real estate attorney.

But wouldn't a federal tax lien show up with the title search? If we don't get a clear, clean title to the home, the deal wouldn't be closed. I'm sorry to sound so naive- but I am!

 

[cracked1]

But wouldn't a federal tax lien show up with the title search? If we don't get a clear, clean title to the home, the deal wouldn't be closed. I'm sorry to sound so naive- but I am!

It should show up if they do their job right. I'm not trying to scare you off this deal. Private Party Lenders are really very common. It just helps keep you protected if you do your homework. Most likely nothing bad will show up in the report and everything will be fine. That being said, even if something did come up many title insurers would still be willing to issue you a policy but it would be "subject to" any issues that show up which would still leave you out in the cold. The title company can not offer legal advice so it's up to you as the "lender" to know what you are looking at and decide whether to go forward or not. This is why I would get a prelminary report done so you can look it over fully without feeling rushed. Most title companies will do a report for their minimum charge and if the deal closes then whatever you paid will be applied towards the total (which at $12,000 would be a very small difference). Is the bank using a listing agent? If that agent is any good then he/she may have opened title and had a report done already.

 

[hungrymonkey]

I pay more in yearly interest than you are paying for an entire house