How to buy my mothers home?

Question

I asked this previously, but didn't get any answers, or something happened to my question.

My mom is building a house with her fiance. We'd like to figure out a way for me to get her current house. I'm renting, and paying an ungodly amount, her payments are only $100 more!!

Whats the cheapest and easiest way to do this? I'm 20 with limited credit history. We think if I try for my own loan on the home I won't be approved because of this. However I'm married to an active duty military man-- I don't know if this would affect anything.

Can we just put my name on the title and I take over payments?

She does NOT want to leave the title in her name.

What should we do?

Thanks!

Answer 1

The cheapest option is for your mother to keep the house in her name, and rent it to you.  She would declare the rent as income on her tax return, but she is also allowed to deduct the mortgage interest, insurance, property taxes, repairs, and other expenses including depreciation.  Because of this, many rentals generate a loss for tax purposes.  That means she might pay less taxes at the end of the year.  Due to her tax savings, she might be able to charge rent that is less than the mortgage payment, and still break even.

Random Example:

Mortgage payment:  $1,600 /mo

Rent you pay to her:  $1,500 /mo  (fair market value)

Difference is $100 per month or $1,100/ year

Mother's possible tax savings of $1,600 offsets the difference.  She's ahead $500 even charging $100 less per month in rent than her mortgage payment.    

Your mother should work through the calculations with accurate numbers.  Rental income and expenses are reported on IRS form 1040, Schedule E.  Depreciation is reported on IRS form 4562.

If she doesn't want to keep the house in her name, you probably can't simply take over the existing mortgage payments.   At a minimum, you will need to go through the bank's qualification process.  This will cost a few hundred dollars, at least.

She can't just put your name on the title, because most mortgage loans have a due on sale clause.  When the title transfers, the bank wants to be paid, and the existing mortgage balance is due in full.

The bank doesn't just look at credit history when writing a new mortgage loan.  Your income has to be high enough to afford the payments.  It might be better for both you and your husband to apply jointly for the new loan.  The bank will charge closing costs and fees that might be a few thousand dollars.

You haven't said the amount of the existing loan compared to the equity of the house, or compared the total sale price you plan to give your mother.

One other option is for your mother to loan you part of the sales price.  For example:  The house is worth $150,000, and you qualify for a new $100,000 mortgage in your name (or you and your husband's name).  Your new mortgage pays off the existing mortgage.  The deed transfers to your name.  The remainder of the sales price could be given to your mother in the form of "creative financing" where she holds a second mortgage with no payments except a balloon payment a certain number of years (7-10 years) from now.  

The bank usually must be made aware of the details of the second mortgage, however they may allow it since they are in first position if you should default on payments

Your question says you are currently paying "an ungodly amount" for rent.  Now, you are considering making even higher monthly payments in order to buy a house.  If the roof leaks, or the furnace breaks down, do you have the money to fix it?  Can you afford the electric and gas bills?  If the property taxes go up, can you make the payments?   If the answer to these questions is "no", or "I don't know" then this might not be the right time for you and your husband to buy.

This might be the time to save your money, and accumulate a large downpayment for a purchase later when your husband comes home from active duty.

There are tax benefits to owning a home.  There is probable appreciation in value over time, and a probable increase in equity.  These are great benefits of home ownership but there are major financial responsiblities as well.

I hope you can get into the home you want.

Good luck whatever you decide.