Buying home for parents comes with risks

Finances, credit at mercy of cash-strapped relatives
By: Ilyce R. Glink: Inman News
Q: I have a question on behalf of my brother-in-law. His mother and stepfather have asked him to purchase a home for them in his name since they do not qualify. My brother-in-law has a good credit score and credit history. The reason he hasn't purchased a home himself is because he is in the military. He is constantly being transferred from base to base, if not to Iraq.

I advised him to purchase a home for himself and rent it out as an investment since he does have the resources. His mother and stepfather are looking to purchase a home for almost $500,000 dollars. They claim they will transfer the property to their name within two years, and get a mortgage at that time.

I want to know if it is possible for them to qualify to take over a mortgage of that amount in two years' time since they are not even close to qualifying right now. Also what would be the advantages and/or disadvantages for my brother-in-law if he purchased a home entirely under his name but then let someone else use it.

A: It takes more than good credit to purchase a $500,000 house. You also need to show that you can afford to make the payments on this property.

If your brother-in-law has good credit, is prepared to put down a substantial amount of cash on the property, and has the income to qualify for the loan, he may be able to buy the home for his mother and stepfather. It's a very different question, whether his mother and stepfather will develop the credit and income to qualify for the home if they can't qualify now.

A conventional lender would allow him to borrow three or maybe four times his gross annual income, and that's with a 20 percent down payment. He would need $100,000 in cash, and then be able to afford a monthly mortgage payment of $2,528 on a 30-year fixed-rate loan. If he did an interest-only loan, he'd pay around $2,100 per month.

That's fairly hefty mortgage for anyone to shoulder. Of course, if he has saved $200,000 or more in cash, it changes the equation.

Assuming he can afford to buy a home at this price point, let's talk about the advantages (of which there are few) and disadvantages (of which there are many) of this kind of arrangement. As far as I can see, the only advantage is the emotional quotient of the transaction. He may feel it's worth a lot to help them out in this situation. As for disadvantages, your brother-in-law is putting his credit and cash on the line for his parents. I assume they'll make the mortgage, taxes and insurance payments each month, plus do the required maintenance and upkeep of the property.

If not, your brother-in-law could find his good credit wiped out. That would prevent him from buying his own property when he is ready. His credit will be tied up with this $500,000 home for a long time to come. Leaving aside the issue of being compensated for his investment and trouble, it's important that he make sure he's not hurt in doing his relatives this big favor.

What else could he do? I think your advice is sound: If his in-laws are looking for a place to live, your brother-in-law should purchase something he can afford particularly if the home his mom and stepfather want may be beyond his reach and rent it to them. If, in time, they're able to make the payments, they can purchase the house from him down the road with a conventional mortgage.

Q: I signed a quitclaim when I purchased my first new home because I am partnered with a woman. I was told this was a way that she could have something to hold on to in case we were ever to break up. I just want to know if this means I no longer have ownership in our property. I know it's pretty late in the game to be asking this question but could you please help me understand if I still have ownership in our home? Thank you.

A: I'm not sure what you've done, so it's tough to give you advice. But, I'll make an educated guess. The quitclaim deed you signed, if executed correctly, would have given away some or all of your ownership interest in the property. You did not add your partner to the mortgage, however, which you are still obligated to pay in full.

How much did you give away? You might have given your partner some or all of the property. It's hard to know without seeing the actual document you signed. (You may have also violated your mortgage obligation to the lender if you gave away all of the property.)

What I'm unclear about is why you did this. You clearly wanted to protect your partner, but there are easier and smarter ways to do it. If you were worried about her surviving you after your death, you might have purchased an inexpensive term life insurance policy. For a few hundred dollars a year, you could have named her the beneficiary of a policy worth up to $500,000.

You could have also written a will naming her as owner of the property after your death. Once you're gone, she would have had ownership of the property and a tidy amount of cash to help her make the payments.

If you wanted to give her something in case you broke up, it would have been easier to retain full ownership of the property and simply sell the house down the line or take out a home equity loan and give her cash. By giving her some or all of the property, you've lost control. If you break up, she may be able to force you out of the home and you may still have to make the payments on the mortgage, or risk ruining your credit.

This is a lot of control you've handed over. What I'd like you to do now is gather up your documents and make an appointment with a very good estate attorney. You can get a referral to someone through your local bar association. The estate attorney might have other suggestions for your situation. The suggestions may include having wills and even a partnership agreement for the home and other joint interests the two of you may have.

You need to understand what you've done, what the potential ramifications of your actions are, and what you can do now to make the best of this situation. You may be able to help your partner and yourself out in different ways by structuring the ownership of your home by other ways.