Home Buying in 07660>Question Details

Abby, Other/Just Looking in New Jersey

i would like to purchase my parents home. it is valued at $350,000 and are selling the house to my husband and i for $200,000. my fico score is 710

Asked by Abby, New Jersey Sun Jan 17, 2010

and husband is 661. what do i need to do?

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The best way for you to set this up is with a contract of sale. Your parents are selling the house to you for $350,000, with a gift of equity of $150,000, and you having a mortgage of $200,000. If your thought was to have them sell it to you for $200,000, and to have you get a $200,000 mortgage, you could not do it because that would be 100% financing. Doing it the way I said to do it in the first sentence, your husband's credit score would have minimal, if any, impact on your interest rate because you would be below 60% loan-to-value. The reason the gift tax issue was brought up is because your parents could potentially have to pay a gift tax on the $150,000 gift of equity. However, if you read my answer below, you will see that it is not the case. We will assume that the appraisal will come in at the $350,000.
Were you planning on putting any money into the deal? What were you going to do about closing costs?
0 votes Thank Flag Link Sun Jan 17, 2010
I am doing this kind of deal right now for someone who is buying her late grandmother's co-op from her mother and uncle. Her mother is gifting her share. The contract is at the full purchase price agreed, with an addendum that would reference the gift of equity, and you would have them sign a gift letter as well. You can use your money for closing costs, or have a seller's concession written in to the contract for the amount of closing costs, and use the rest of the 5% to lower your loan amount. You may want to double check me on this, but just as an aside, even as a first time home buyer, I do not believe you can get the credit if it is a family sale.
1 vote Thank Flag Link Sun Jan 17, 2010
thanks for the quick response Robin. Closing cost would be included in the mortgage which my parents agreed to. I will also be putting a 5% down payment. I know it's not much but my parents just threw this on us FIVE days ago. i am a first time home buyer, so excuse me for mortgage101 questions.
0 votes Thank Flag Link Sun Jan 17, 2010
can some please explain to me what a gift tax is? like i said, house was appraised for $350,00 and is being sold to us for $200,000. it sounds like there would be tax implications?
0 votes Thank Flag Link Sun Jan 17, 2010
Hi Abby,

Speak with an attorney ASAP to get the transaction together.

As far as the as far as the value you of the house being sold to you... 320k sounds like a great deal and I did see you use the words "purchase the home" from your parents.

There is no gift in there. Speak to an attorney to facilitate the transaction for you.

If you need the name of a good Real Estate attorney, email or call and I can help you with a few!

Good Luck!
0 votes Thank Flag Link Sun Jan 17, 2010
Abby, it should be a very simple transaction if handled properly and I have done quite a few of these.

With the numbers you are providing, you are in a great position. Your downpayment can be a "gift of equity" and closing costs should also come out of the equity of the house.

You should be able to buy the home without any money out of your pocket.

Feel free to contact me for more information at 908-415-3958.
0 votes Thank Flag Link Sun Jan 17, 2010
Marc, there are many accountant that are not familiar with the gift tax regulation. I have had many clients repeat what their accountant has told them, and it is incorrect. My husband is a Trust and Estates attorney, and very familiar with the law. Although a gift tax return is required for all gifts over the current year's limit, which is either $12,000 or $13,000 this year, which can be multiplied by 4 if there are 2 living parents and the wife plus spouse, the excess goes toward their $1 million lifetime exclusion on gifts.
0 votes Thank Flag Link Sun Jan 17, 2010
Also check with your accountant to make sure that there is no income tax implication. You are basically getting a $150,000 gift.

-Marc

Marc Paolella
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0 votes Thank Flag Link Sun Jan 17, 2010
As the others say, start with a good mortgage broker. I think we're all assuming here that your parents owe less than $200,000 on the property. If they owe more, your purchase price wouldn't be enough to settle the existing mortgages, and that'd be a big problem.

One additional way to do it is for your parents to hold the financing. You wouldn't even have to apply for a new mortgage with some lender. Instead, your parents would act as the bank. You'd pay them every month. That works best if they own the home free-and-clear. Otherwise, transfer of title without paying off the mortgage could trigger the lender's due on sale clause. If they still do have a mortgage, there are ways to address that--a wrap mortgage, for example.

One additional piece of advice: Your parents should consult with their CPA or accountant. There are all sorts of possible tax implications for them. And there are some implications for you, though generally not as serious.

A final thought: There are ways to accomplish the transfer using a trust, specifically a land trust, that might have benefits for all of you.

So, your parents and you really should consult with an accountant. There are a lot of ways to maximize the transaction for both you and your parents . . . and a lot of ways to expose yourself to tax or other liability when it's easily avoided.

Hope that helps.
0 votes Thank Flag Link Sun Jan 17, 2010
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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Hi Abby, you need to speak to a mortgage pro to line up financing. You should be fine based on whatyou have shared from an appraisal standpoint. The evaluation by the underwriters at the bank involve a review of two things, the value of the property and the creditworthiness of the borrower. The appraisal takes care of the property value question, the application and necessary documentation to support provides the bank what they need to finalize their review of you as a borrower. Before you get that far though, you should have a preliminary call with a good mortage rep - she/he will be able to help you understand your buying process and review mortgage products that are available to you.

I've got two super mortgage resources I'd be happy to share with you. If you are interested, reach out to me and I'll pass them along.

Best,
Jeanne Feenick
Unwavering Commitment to Service
Search the MLS at http://www.feenick.com
Web Reference: http://www.feenick.com
0 votes Thank Flag Link Sun Jan 17, 2010
This would be just like doing a for sale by owner. Talk to a lender to make sure that you qualify for a loan and then get an attorney to draw up the documents needed for the sale. As long as it's a clear cut deal between you and our parents, then there shouldn't be any problem. Once you get everything together then go thank your parents for doing such a nice thing for you.
0 votes Thank Flag Link Sun Jan 17, 2010
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