Gifted a house with a mortgage... What to do?

Question

My wife and I were married last year, in June. We were gifted a house in Myrtle Beach by her parents. Since they themselves bought the property, deciding instead to remain in Philadelphia, nothing but a HARP Loan has happened. This morning I woke up, after last night's webinar, with fresh ideas in my head.

Please, tell me if I'm right or wrong, or if you have other ideas of "how to" or "not to."

So the gift is the equity, we have to buy out the current loan to allow the transfer. Or we're buying them out at the payoff amount. We want to balloon the offer to capture that equity and rehab the place. Is this all the same as BRRRR, so far? Next, rent it at a higher price, and put the remainder back into the equity under our name. Then in some time, maybe six months or a year, refinance, repay the direct lender, and pick up something else. Is this the right idea? What am I leaving out? What might I be missing? What more or other stuff can I do?

Thank y'all!

Account Closed · Answer

Congratulations to you and your lovely bride.

You have several options.

1. You can simply have the property deeded to you by Warranty Deed and start making the payments on the property. It is called taking the property "Subject To". Do a search for how that works. Say the loan is $75,000 and the payment is $500. You make the $500 payment to the folks and they send in the payment to the bank. The loan stays in the parent's name. The title goes into you & your wife's names.

2. You can sell the property and use the proceeds. There may be capital gains taxes to the folks if not done properly. You'd want to talk to a tax CPA before choosing this option.

3. You can't keep the loan in their name AND take out a new loan without paying off their first loan. It gets paid off by your loan and you get any extra. For instance, the mortgage is $75,000 and you take out a $100,000 loan. At escrow they will pay off the $75,000 and you get $25,000 minus closing costs.

4. You will probably find that you can't take out a "second" if you leave the "first" the way that it is. There may be some bank out there that will do it, but it isn't common without your folks being involved and I don't recommend them being involved. Plus, they've given you so much already.

I favor option 1 and have been doing those types of transactions for 25 years. They are the least expensive and least burdensome way to take ownership of a property, but it needs to be set up the right way. Any competent real estate attorney can do that for you.

Do your research first and look at "Subject To", Wraps, Land Contracts, Owner Financing. Plenty has been written about those tools.

Jonathan Measor · Answer

@Mike M. Thank you, Mike.

Account Closed · Answer

I've been married 40 years and one of the best books I've ever read on marriage is "His Needs / Her Needs" by Harley. It's worth a good read.

I don't know what the requirements for an equity loan are. I rather suspect that whoever is on the first loan would have to be involved but I don't know that to be a fact.

On the first there is most likely a "Due on Sale" clause which means the bank CAN, but rarely does, call the loan due when the title changes hands. So, technically the lender can make you pay off the loan if the 1st lender gets involved. However, if payments continue to be made on time it is rarely an issue. So, be careful about that part.

If you try to do an equity while the first is still in their name, it is likely the first will be notified at escrow or when the Homeowner's insurance gets updated.

You may be able to get around that issue by Quit Claiming you and your wife onto the title, leaving her folks on for now, get an equity loan on your credit and when the rehab is done Quit Claim her parents off.

Talk to a mortgage broker to see if this will even work in your state and your circumstances.

Jonathan Measor · Answer

@Mike M “aah jeez Edith. “ I just saw the quitclaiming in your final response. I guess I wasn’t ready pick up the info and had to learn much more beforehand.

Jonathan Measor · Answer

@Mike M. Hi. I keep revisiting this post as I learn more and I think the like old English common law wording of all these laws is tough to grasp. Warranty deed and quitclaim deed seem to be the most applicable. Thanks for mentioning the warranty deed. I’d never have become aware of Quitclaims. Can you offer further benefits and differentiations to both? South Carolina’s laws were written by Geoffrey Chaucer.

Jonathan Measor · Answer

@Mike M. Wow! Great response, thank you for sweet words and the knowledge you’ve passed along here. So many new terms I was unaware of and so many more riches beyond them.

Although, I’m not clear about an equity loan to update the property. Ive already gotten some estimates for repairs and we’d need to pull out about $30k to do so. Would my in-laws be required to draw the loan and the liability? They’re not in a position to privately loan to us any funds, but also they may not even have the credit parameters required by a bank to obtain a loan.

Thanks, Mike!