Home loan financing question

July 31, 2005 9:26 AM

Home Buying Question: As a low-income artist, I’ve recently taken the plunge and qualified for a zero-down, stated income loan, and have found a great place to buy. But now there’s a complication with parental involvement which I have no idea how to deal with. It’s not what you might think...

See, when my retired folks got wind of the purchase, they offered to lend me a significant amount of money (~150k) on long & generous terms, to be applied to the house purchase in some way with the intent of getting me away from an adjustable rate or an interest-only loan. Problem is, I’ve never dealt with anything like that kind of money, and am at a complete loss as to how to incorporate these funds into my home loan strategy. It’s like a big golden monkey wrench has been thrown into my simple plans. Accepting gifts that large are out of the question, but they don’t necessarily want to be co-owners (i.e. on the title) of the house. What kind of options should I be looking into?

posted by Aquaman to Work & Money (16 answers total)

No shame in not knowing...go speak to someone who does: a financial advisor. That doesn't mean someone at the bank, by the way, as their interest is in taking as much of that money from you as possible why giving little in return.

There's a lot of details that the people here won't/can't be privy to. But a local financial advisor can get a better grip on your whole situation and help you make a decision that's right for you and should end up saving you money well past what you pay him or her.
posted by Kickstart70 at 10:02 AM on July 31, 2005

I concur--see an indepedent financial advisor (and the key is independent)--if he or she even suggest a product which they could provide--no matter what it is--say no thanks--asume they are not independent and do not pay a consultation fee--you might check around and find a CPA who specializes in tax and real estate--i hope you find a reasonable solution as this should be a wonderdul opportunity for all of you--this is a complicated issue as it involves tax advantages/liabilities, loan rates, the nature of your present loan and your parents estate planning--good luck
posted by rmhsinc at 10:10 AM on July 31, 2005

I think you can easily write up a loan agreement with your parents with an amortization table and everything. I have had a few friends who have done this. There is absolutely NO shame in it. Housing prices are incredibly ridiculous, especially for first time home buyers. Frankly, I don't know how people are managing it these days.

Here is a site to help you compose the loan agreement and fill in the terms. If it would make you more comfortable, you could retain a real estate lawyer to review the documents and "bless" them. You can also hire an appraiser to review the house and determine value for the purposes of the loan.

The real estate lawyer can also advise on a third party to handle the monthly transactions, if that would make you more comfortable. This would also set up an easier to verify paper trail for tracking credit related information, which will be a help to you for future loans and such.

If you have other options besides a zero-down payment loan, I would take them. Although it helps you get into a house, zero-down payment loans generally have a variable interest rate instead of a fixed rate. This will give you headaches as interest rates continue to rise, because it doesn't allow you to easily plan for all of you mortgage payments. Fixed rate loans are a first choice, if you can qualify for one.
posted by jeanmari at 10:15 AM on July 31, 2005

Best answer: With $150K, there's a good chance that a well-informed financial advisor can identify a principal-insured, dividend-paying investment that will cover all or much of your monthly mortgage payment, with the additional bonus of profits gained by an increase in value of the investment.

IOW, you can have your cake and eat it, too.

My parents have done exactly this several times: having paid off their mortgage, they have been able to remortgage, invest the money, and make money off the bank's money.
posted by five fresh fish at 10:28 AM on July 31, 2005

Also, it's worth noting that at variable rate mortgages have historically been less expensive than fixed-rate mortgages.
posted by five fresh fish at 10:29 AM on July 31, 2005

five fresh fish: Perhaps (and I would be interested in seeing your source for that), but we are talking about a fixed rate mortgage today when rates are relatively low. Has a variable rate mortgage historically cost less than what a fixed rate mortgage taken out today does? I doubt it. Does it beat the rates from the early 80s when the federal funds rate was in the double digits? For sure.
posted by grouse at 10:57 AM on July 31, 2005

fivefreshfish is right. I should have qualified my comment about fixed rate mortgages. Fixed rate is great if the mortgage starts off with an already low rate. When interest rates are outrageously low AND you plan to stay in your home for longer than 5 years, the scales can tip to fixed rates being more favorable. We plan to stay in our home at least 10 years and borrowed when fixed rates were hovering around 5%.

Variable rates are great for shorter-term living situations, when your monthly payments can withstand some variation as rates change, and when interest rates are higher to begin with.

That's what I get for posting on MeFi while still VERY pre-caffeine. Ugh.
posted by jeanmari at 11:03 AM on July 31, 2005

Best answer: You'll save on points, too. You can set it up as a 2nd mortgage, and reduce the amount you borrow from a bank. The bank won't care, as long as they are 1st in line, plus, they are better protected as you are borrowing less from them. Best to get it looked at by a lawyer. You bring the $ from your folks to the closing, and the mortgage is executed at the same time as the 1st mortgage. Excel will do the amortization table.

I had a secured loan when I borrowed money from my Mom to buy a business. It was pretty straightforward.
posted by theora55 at 11:21 AM on July 31, 2005

Beware of gift taxes as well. If you don't do all the paperwork correctly, the IRS could interpret the loan as a gift. If that happens, the IRS grants your parents an exemption on how much money they can give to others during their lifetime without paying gift taxes (I don't remember how much but it's way more than $150K), but you and they would still have to declare the gift. Talk to a tax advisor before you draw up the loan papers.
posted by fuzz at 11:52 AM on July 31, 2005

Best answer: If you use the $150K as a second mortgage (with the caveat that it truly is structured as a loan), then you can probably qualify for a fixed rate mortage with a decent rate - under 6%, I'd guess - (removing your parent's concern, which, quite frankly, I think is reasonable). For example, on a $300,000 house, you'd apply to a bank (say) for a $150,000 first mortgage. With the first mortgage being only 50% of the value of the house, many lenders will be willing to give you a competive rate (equivalent to having better income and/or credit scores) because they essentially have no risk.

I recommend talking to a mortgage broker about what your options are for a first mortgage. Your real estate agent can recommend a broker, if you're not already dealing with one.

As far as consulting a tax advisor goes, as discussed in another recent Q&A, any gift tax is paid by the giver, not the person receiving the gift. So it's your parents who should consult a tax advisor (or, at minimum, worry about this issue).
posted by WestCoaster at 12:02 PM on July 31, 2005

Just make sure you dont stretch over your limits - use this as a chacne to build a solid finacial foundation - As a prior mortgage broker, all of the previous advice is sound.. which directyou take is up to you! Congrats!
posted by crewshell at 12:25 PM on July 31, 2005

Buy two shares of Berkshire Hathaway. :P
posted by delmoi at 2:45 PM on July 31, 2005

Response by poster: Thanks for all the advice! I'll be visiting a financial advisor tomorrow, and I really appreciate all of your comments & suggestions. I'm having a hard time wrapping my brain around the possibilities; this is very close to 2 orders of magnitude more cash than I've ever had to deal with before. Yipes!
posted by Aquaman at 4:06 PM on July 31, 2005

Also, it's a potentially good win-win practise in principle, since the interest banks charge on loans is higher than the interest banks give on savings, thus you can pay your parents more interest than they would get from banking the money, and you'd still be paying less interest than if you borrowed from a bank.
posted by -harlequin- at 6:51 PM on July 31, 2005

five fresh fish: With $150K, there's a good chance that a well-informed financial advisor can identify a principal-insured, dividend-paying investment that will cover all or much of your monthly mortgage payment, with the additional bonus of profits gained by an increase in value of the investment.

Do you really mean "insured"? Or do you just mean relatively low risk of loss, like a utility company?
posted by mullacc at 6:55 PM on July 31, 2005

I mean absolutely insured. As in no risk of losing one's principal, save the complete economic collapse of the world banking and insurance industries.

I don't recall the details, but it was one helluva deal. Guaranteed principal, great dividends, and the chance for an increase in value.
posted by five fresh fish at 10:03 AM on August 1, 2005