How to do this? - Posted by Ann

Posted by Sean on May 11, 1999 at 08:27:16:

I’d say start by refinancing your house taking cash out up to $150,000. Then you sell both your house and $30,000 to your son on a land contract for $200,000 (in essence the $170,000). He’ll then make payments to you, you’ll make payments on the underlying loan, and he’ll have enough money to complete the repairs and remodel.

How to do this? - Posted by Ann

Posted by Ann on May 11, 1999 at 07:22:46:

We want to sell a house to our son…Because of his debt from a divorce, he will have trouble qualifying…we owe 86,000, which he can qualify for, but if we carry the balance, which we are planning to do, will that be considered when he tries to qualify for the first? The house would be worth 210,000 to 225,000, but needs repairs. We are selling to him for 170,000. So he was hoping to borrow another 30,000 for remodeling. He will have 20,000 for the repairs, from sale of his home. How can we do this? We can’t just say we are selling to him for 86,000, and carry the note as a seperate issue can we?

Re: How to do this? - Posted by JPiper

Posted by JPiper on May 11, 1999 at 12:07:15:

The answer to your question is yes. If you sell the property to your son for $170K, with him getting a new loan of $86K and you carrying a second for the balance, the lender will consider BOTH loans for the purpose of qualifying.

You don’t say what you’re attempting to accomplish here. But one thing I personally wouldn’t be attempting to accomplish is to get my son into a leveraged situation that he can’t pay for. That’s the whole purpose of income qualification by a lender?.and something I think you should evaluate yourself to avoid problems with your son further down the road.

Having said all this, IF your point here is to essentially help your son, AND you’re not particularly concerned with your own financial goals here, Sean has a good idea below. His idea involves you further encumbering the property. This works if the lender is OK with the property ($50K is a lot of rehab) and if YOU are OK with going into further debt and if YOU are able to qualify for a larger loan.

You could sell for $170K, with your son getting a new first mortgage of $86K and you carrying the balance of $84K at say 7% interest for 30 years (perhaps with a balloon at which time your son would need to refinance). Payments on the first might approximate $601 PI. Payments on the second would approximate $558?.a total of $1159. Add taxes and insurance to this. If your goal here is to basically make a gift, you could create an interest only loan which at 7% interest would create a payment of about $490. Then you could forgive $20K of the principal each year.

To avoid qualification, you could deed all or part of the house to your son. This issue is mentioned in the Garn St Germain act. It’s clear that at least deeding a part of the house to your son does NOT trigger the due on sale clause. Whether deeding all of the property to your son does is not exactly clear to me?.but it may not. Have your attorney take a look at the Garn Act if you’re interested. The problem with this is that you still are liable for the loan?.although if you’re carrying a second you have the right to foreclose if your son doesn’t make the payments to take the house back. Understand that I have seen MANY situations where parents have tried to help children in obtaining loans, only to have the children treat the parents credit with irresponsibility. IF you do this particular one, I would personally have your son pay you, and then you pay the bank. Understand that YOU are still responsible for the loan.

To get the other $30K, you could agree to subordinate your second to a new second to be obtained by your son. You could do this with either of the two scenarios above. Understand that this would make your note a third?.and therefore LESS secure.