Once upon a time we bought a house...
January 11, 2008 11:18 AM Subscribe
What options are available to two individuals who co-own a house and one wishes to buy the other one out?
First, let me ask that you please refrain from commenting on 'what a terrible idea it was to buy a house with a friend' or other such ideas. Despite all the traps that we could potentially have fallen into we've easily avoid all of them. This is not a Human Relations question.
A few years ago my friend and I jointly purchased a home. We have an excellent fixed rate mortgage and are both listed on the deed and all the paperwork. We both now have significant others and are slowly exploring what options are available to us now that I am interested in selling my half to her. Ideally (and this is of course a very simply version of how it would happen) we would have another home inspection, have the home appraised and she would simply write me a check for half the difference between the current market value and what we paid for it, plus half of our current equity. Then I would sign over my ownership to her. Is this even legal? She does not want to re-finance and she does not want to lose the interest rate we currently have.
Provided she has the funds to do this, does the bank (our lender) need to be involved?
What potential (non-human relations) pitfalls should we seek to avoid?
How might my taxes be affected if I suddenly deposit a check for $50k.
We are interested in hearing if anyone else has done something similar and if you know of any online resources that might be relevant.
We will be speaking to our lender and an accountant but before we do that we hope, with your help, to educate ourselves enough that we know what questions to ask.
First, let me ask that you please refrain from commenting on 'what a terrible idea it was to buy a house with a friend' or other such ideas. Despite all the traps that we could potentially have fallen into we've easily avoid all of them. This is not a Human Relations question.
A few years ago my friend and I jointly purchased a home. We have an excellent fixed rate mortgage and are both listed on the deed and all the paperwork. We both now have significant others and are slowly exploring what options are available to us now that I am interested in selling my half to her. Ideally (and this is of course a very simply version of how it would happen) we would have another home inspection, have the home appraised and she would simply write me a check for half the difference between the current market value and what we paid for it, plus half of our current equity. Then I would sign over my ownership to her. Is this even legal? She does not want to re-finance and she does not want to lose the interest rate we currently have.
Provided she has the funds to do this, does the bank (our lender) need to be involved?
What potential (non-human relations) pitfalls should we seek to avoid?
How might my taxes be affected if I suddenly deposit a check for $50k.
We are interested in hearing if anyone else has done something similar and if you know of any online resources that might be relevant.
We will be speaking to our lender and an accountant but before we do that we hope, with your help, to educate ourselves enough that we know what questions to ask.
The way it works in Canada, is that if I'm removing a party from a joint mortgage, the remaining party would have to be able to qualify on his own to handle the mortgage, or introduce a guarantor.
It's a change of contract, so there's a good chance you may have to renegotiate the mortgage.
posted by smitt at 11:35 AM on January 11, 2008
It's a change of contract, so there's a good chance you may have to renegotiate the mortgage.
posted by smitt at 11:35 AM on January 11, 2008
Best answer: Yes, if you don't get your name off the mortgage you'll still be liable for it. Talk to your lender; when I bought my ex-boyfriend's share of our house, Countrywide let me assume the existing mortgage and no refinancing was required.
What we did: arranged two appraisals (we each picked our own appraiser), negotiated a price based on those, had a real estate lawyer write up deed transfer paperwork, and had a little "closing" where we signed that paperwork and the mortgage assumption documents and exchanged a check.
There weren't any tax implications for me (for tax purposes, my accountant treated buying half a house the same way you'd treat buying a whole house); my ex-bf realized a capital gain on his half, but it was well below the exclusion level (which I *think* is currently $250,000) so he didn't owe anything, either. We prorated our mortgage interest and property tax deductions so we both got credit for what we'd paid.
posted by magicbus at 11:44 AM on January 11, 2008
What we did: arranged two appraisals (we each picked our own appraiser), negotiated a price based on those, had a real estate lawyer write up deed transfer paperwork, and had a little "closing" where we signed that paperwork and the mortgage assumption documents and exchanged a check.
There weren't any tax implications for me (for tax purposes, my accountant treated buying half a house the same way you'd treat buying a whole house); my ex-bf realized a capital gain on his half, but it was well below the exclusion level (which I *think* is currently $250,000) so he didn't owe anything, either. We prorated our mortgage interest and property tax deductions so we both got credit for what we'd paid.
posted by magicbus at 11:44 AM on January 11, 2008
You need a lawyer to deal with this. The issues are too complex to just wing it.
posted by Ironmouth at 11:46 AM on January 11, 2008
posted by Ironmouth at 11:46 AM on January 11, 2008
Best answer: I don't think you need a lawyer. This is a very simple transaction.
Start by contacting the lender and find out what it requires. Virtually all loans given to more than one person contain clauses that cover what to do when one wants out. Many loans allow one person to keep the entire mortgage in her name, provided that she would qualify for that loan on her own. Having made on-time payments to this lender for several years will factor in very favorably. The lender will tell you what you need to do in order to keep the loan, and might even offer you a better alternative. Loan rates are very low right now.
You'll need to get an appraisal (the lender might select one for you) and have the paperwork done by a title company. No inspection should be necessary. How the two of you work out what she owes you won't really interest the lender. Your roommate would benefit from obtaining title insurance.
About the cash deposit, this is from a home sale, so report it on your taxes as such. There are huge deductions for any capital gains, and the amount you have earned in a few years won't come anywhere close to hitting that level, so there won't be any tax implications (aside from changing how you file your taxes).
Whatever you do, don't leave your name on the mortgage or the home owner's insurance. Don't grant a quitclaim deed either. Your friend's ability to sell the house later will be significantly hindered if you do either of those. For the sake of her ability to actually own and sell this house, be sure you grant a warranty deed. The title company will know how to do all of this. This of course also protects you in the event that she (he?) defaults (which can happen through illness, a lousy roommate/S.O., problems with neighbors, changing zoning, or a dozen other things that have nothing to do with trusting her to keep up with the payments).
posted by Capri at 12:36 PM on January 11, 2008
Start by contacting the lender and find out what it requires. Virtually all loans given to more than one person contain clauses that cover what to do when one wants out. Many loans allow one person to keep the entire mortgage in her name, provided that she would qualify for that loan on her own. Having made on-time payments to this lender for several years will factor in very favorably. The lender will tell you what you need to do in order to keep the loan, and might even offer you a better alternative. Loan rates are very low right now.
You'll need to get an appraisal (the lender might select one for you) and have the paperwork done by a title company. No inspection should be necessary. How the two of you work out what she owes you won't really interest the lender. Your roommate would benefit from obtaining title insurance.
About the cash deposit, this is from a home sale, so report it on your taxes as such. There are huge deductions for any capital gains, and the amount you have earned in a few years won't come anywhere close to hitting that level, so there won't be any tax implications (aside from changing how you file your taxes).
Whatever you do, don't leave your name on the mortgage or the home owner's insurance. Don't grant a quitclaim deed either. Your friend's ability to sell the house later will be significantly hindered if you do either of those. For the sake of her ability to actually own and sell this house, be sure you grant a warranty deed. The title company will know how to do all of this. This of course also protects you in the event that she (he?) defaults (which can happen through illness, a lousy roommate/S.O., problems with neighbors, changing zoning, or a dozen other things that have nothing to do with trusting her to keep up with the payments).
posted by Capri at 12:36 PM on January 11, 2008
Response by poster: Thanks hive-mind, this is exactly the type of information we were hoping for. We truly appreciate it.
posted by J-Garr at 12:49 PM on January 11, 2008
posted by J-Garr at 12:49 PM on January 11, 2008
Most mortgages originated in the last few years are not assumable, so your friend will probably have to refi the mortgage in their name only. Interest rates are still very low. Typically you won't be subject to capital gains taxes on the sale of a primary residence but definately consult your accountant.
Whatever happens make sure you do not take yourself off title while remaining on the mortgage. Being responsible for the mortgage with no ownership rights would be a very bad deal.
posted by curlyelk at 12:59 PM on January 11, 2008
Whatever happens make sure you do not take yourself off title while remaining on the mortgage. Being responsible for the mortgage with no ownership rights would be a very bad deal.
posted by curlyelk at 12:59 PM on January 11, 2008
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You will also have tax implications from that deposit and it will have to be reported to the government under anti-money-laundering laws.
posted by TedW at 11:34 AM on January 11, 2008