Need input for a family situation.

Buying & Selling Real Estate
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Need input for a family situation.

Account Closed
Irvine, CA · Member since 2014 · 22 posts · 5 votes

Young guy looking for some guidance. Didn't know if this was an appropriate section or not. Taking any advice, input, and/or suggestions.

My parents currently own a 6 bedroom house hold in the city of Ventura, CA. Unfortunately, my father got laid off a few months ago and now they can't keep up with the mortgage. At the moment, they are relying on savings and a few renters to pay the $3400~ mortgage payments. They come to a realization that they don't need the big household and it is not worth holding anymore. At the current rate, they will have to foreclose/short sale/ etc. So naturally they are looking to sell the current residence and downsize into something smaller, possibly a manufactured home. Unfortunately, back in 08’, they already underwent a short sale causing their credit to sink. No lender will consider them for a loan on a new house.

I am the only one in my family who has good credit and a stable form of employment. My parents reached out to me to see if I was willing to help. The agent suggested that I could buy the new house under my name and rent it out to my parents. My father did get a new job a few weeks ago that would hopefully cover the mortgage payments if I get a good deal on a house. The RE agents said it would work if we find a home valued approximately around 250k. Essentially, I would buy the house, my parents would maintain, pay, and hold the house. They would also cover the down payment. The money made from selling their current residence is approximately 50k.

RE Agent is telling me to look at this in the long run as a future investment. One day I would be able to sell or rent out the property, but in the mean time I won’t have to worry about it.

I guess I wanted to see if this is a smart move.

Is the RE agent right on how I should look at this situation, a long term investment?

Would this ruin my credit or chance in any way for when I decide to purchase my own house?

Is an FHA loan possible? Or is that something I should save for myself?

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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
12y
Why don't they just rent? Given your hesitation, that seems a cleaner path.
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  • Jordan Thibodeau
    Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes
    12y

    Hi @Account Closed !

    Depends on what your interests are, do you want to become a buy and hold investor or do you want to be a flipper? What's your relationship with your parents? If your dad loses his job again and he can't pay the mortgage, what's your plan?

    Have you check out the bigger pockets rental calculator to see if your numbers make sense?

    If you can buy this through a standard transaction, and it appraises, you should be able to purchase this with a FHA loan.

    If the deal worked and cash flowed, this wouldn't hurt your credit, if anything it would strengthen it because you have a performing loan under your belt.

    Cheers,

    Jordan 

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  • George C.
    Involved In Real Estate · My City, NJ · Member since 2013 · 181 posts · 81 votes
    12y

    The new home might not be looked at as a "performing investment" till after two years of being rented, so that mortgage being out there might limit you if you go to buy something for yourself, or an investment.  Let's say you can qualify for a $500K mortgage with your job & credit, but there is a $200K mortgage already out there (parents new home), you might be limited to a borrowing of only $300 for your purposes. Something to ask a bank or mortgage broker before you decide.

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  • Tim Soto
    Realtor · Ventura County, CA · Member since 2012 · 126 posts · 61 votes
    12y

    Hi Leo,

    I did the exact same thing for my parents when I first started out. If I'm able to pay PITI on my own, just in case I have to pay it, then I would do it (just because it's for my parents). Based on my experience, this property won't be looked at as an investment property if there is no income when the time comes to buy a home for yourself, more like a second home. Or they'll ask for a copy of the lease agreement, which you can easily draft up. And make sure to keep records to show that you're not paying the mortgage so that the bank knows that you won't be paying the two mortgages on your own. I don't think it'll hurt, more likely help your credit.

    Talk with a seasoned and knowledgeable lender, who'll give you the rundown on the best mortgage to use for this type of situation. If I'm not mistaking, if you're going to put the required 3.5% down payment on an FHA loan, remember that now the mortgage insurance for an FHA loan stays on for the life of the loan, and in Ventura County, that's like $300+ a month. There's the 5% conventional to think about as well, but I would ask a good lender, because they're always changing and I'm not a lender... I'm just going off of my own experience or past client buyers. Hope this helps.

    Good Luck!

    Tim

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    12y

    @Account Closed 

    First, I sincerely commend you in wanting to help out your family. Since the house would be considered non-owner occupied, you would have more stringent loan underwriting. The best thing you can do is to contact a trust loan advisor.  I am in Ventura County & can recommend someone if you need a referral.

    The other issue here, in my opinion, is that when you are helping family it is not an investment.  It is a gift.  The agent is using encouraging language to help you feel better about the transaction.

    If you are clear that purpose of this acquisition is primarily a gift, & you are ok with that, go forward.  If it works out financially in the end, consider that a bonus.

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  • Ewa RezaPro Member
    Real Estate Agent · Los Angeles, CA · Member since 2009 · 146 posts · 75 votes
    12y

    @Account Closed you can purchase several homes with FHA loan. The questions is only the amount of down payment. Only if the property is owner occupied you'll be able to do 3.5% down.

    If I were you I'd get the house for your parents as owner occupied with FHA 3.5% down and refinance it to conventional loan in 2 years or so. You may be able to refinance even sooner if the real estate will continue appreciating with the current speed. And then you'll be able to buy another property (for yourself) using 3.5% down FHA mortgage.

    And as long as you're paying on time your credit core not only won't get hurt but also  should increase greatly.

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  • Account Closed
    OP
    Irvine, CA · Member since 2014 · 22 posts · 5 votes
    12y

    I have a good relationship with my parents. I can entrust them to take care of the house. I seethe concern that what will happen if my dad loses his job again, I will need a back up plan. Unfortunately, I don't live with them and If he did lose his job I would not be able to keep up with my rent and the mortgage. He is only a few years away from retirement; I guess I'll have to see how much they will make in retirement and make a judgment on how I feel about them making payments.  

    @George C. 

    I'll be sure to talk to the mortgage broker about that. I am not exactly looking to buy a house anytime soon, but definitely a concern I have if I happen to pursue that route sooner than expected. 

    @Ellis San Jose 

    Is you refering to a deed of trust over the permissary with the bank? And I'll be sure to keep in mind that the RE agent may be trying to fluff me into this.

    Thanks everyone. I'm not sure if BP was the place to discuss this with everyone, but I really had no one else to go to. And the RE agents said to look at it as a long term investment and I wasn't sure if that's how I should go about looking at this.

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  • Account Closed
    OP
    Irvine, CA · Member since 2014 · 22 posts · 5 votes
    12y

    UPDATE:

    Apparently my mother's credit is fine, but her lack of employment deters lenders. I spoke with the loan officer and she said that my mother and I going in together as a cosigner with an FHA loan would be beneficial.

    She explained that, as long as I can prove my parents are the living at the residence and they are paying the mortgage, it should not affect my barrowing abilities come 3-4 years from now as long as I can prove such.

    Does this sound correct to you all?

    I understand that I should not look at this as an investment and that this truly comes down to if I can rely on my parents on keeping up with the mortgage. But if I am to do this, I want to make sure that my future buying/investment plans will not be ruined by this deal.  I am going to speak to another loan officer for other opinions and accuracy of what I was given, but I wanted to check with BP community as well.

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  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    12y
    Why don't they just rent? Given your hesitation, that seems a cleaner path.
    1Reply
  • Account Closed
    OP
    Irvine, CA · Member since 2014 · 22 posts · 5 votes
    12y

    I should have mentioned that I am trying to get them to settle with renting. I am showing them some great places. I think the "I want to be a home owner" mentality is set in their minds. They came to me and asked me to help and I thought it would be a great way to say thank you (I won't delve into my family dynamics). Additionally, the RE agents fluffed me into this idea of an investment, but as many posted previously, it really isn't.

    Even if I do not go the purchasing route and they do end up renting, I figured this would be a step forward in learning more about purchasing/investing for my future. Still a young guy taking opportunities to learn. Even made some new colleges from this thread.

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  • Anne Wallace
    Investor · Nashville, TN · Member since 2014 · 104 posts · 15 votes
    12y

    @leo Lupoli

    Hi Leo

    Aside from the investment aspects of this deal...how might you feel later if later on your parents don't seem to appreciate your efforts on their behalf or engage in " bad choices " related to the payments on the property ? Would you even consider this if they were not your family ?

    In my experience family can come to resent other family members that" help" them. It is great that you want to help them and admirable. I hope you get the result you want. 

    Best to you all. 

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  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    Have you considered a small multi-family property like a duplex/quad? (don't know how prevalent these are in your area) You can still get an FHA loan for up to four units - I think the downpmt may be somewhat higher than 3.5, not sure. That might be something that could actually prove somewhat of an investment going forward. Or you might be able to structure it so that your parents own their unit and you own the other(s). Just some food for thought.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Account Closed:

    I should have mentioned that I am trying to get them to settle with renting. I am showing them some great places. I think the "I want to be a home owner" mentality is set in their minds. They came to me and asked me to help and I thought it would be a great way to say thank you (I won't delve into my family dynamics). Additionally, the RE agents fluffed me into this idea of an investment, but as many posted previously, it really isn't.

    Even if I do not go the purchasing route and they do end up renting, I figured this would be a step forward in learning more about purchasing/investing for my future. Still a young guy taking opportunities to learn. Even made some new colleges from this thread.

    In the last year I've had calls from 3 sellers, all in your position after the parents couldn't keep up with the mortgage. Interestingly, all three properties were in Ventura.

    For now I think your parent's monthly housing payment is better spent on rent until things stabilize.  A new job is great, but it's new.  Also, you mention your parents getting towards "retirement".  What's that income going to look like?  What kind of housing payment will their non-working income be able to support? Have either of your parents had jobs with pensions? Are they going to be living off only social security? How much do you think they can/will save between now and when they have to stop working? 

    There are a lot of folks in their 60s right now who don't have savings or home equity or pensions to look forward to.  Their kids, assuming they have income, are going to be picking up a lot of slack.  At least as much as their income will allow.  If your current income can't support two housing payments, I wouldn't borrow money for a house you don't live in, regardless of whether it's for your parents.  IMO, you need to start doing the things that will benefit you, your parents and your future family in the long run. Save money, live below your means, make sound financial decisions. 

    Sorry for the mother's advice post.  I just hate to see people get caught up in bad financial decisions when it comes to homeownership.  Sorry this one involves your parents.

    1Reply
  • Bryce Y.
    Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y
    Originally posted by @Account Closed:

    I should have mentioned that I am trying to get them to settle with renting. I am showing them some great places. I think the "I want to be a home owner" mentality is set in their minds. They came to me and asked me to help and I thought it would be a great way to say thank you (I won't delve into my family dynamics). Additionally, the RE agents fluffed me into this idea of an investment, but as many posted previously, it really isn't.

    I'm not sure your parents fully realize the potential burden placed on you if you decide to buy the house.  What happens if you buy it and your folks fall on hard times and can't pay the rent?  I'm guessing you're not going to evict, so that leaves you eating the mortgage payments every month and makes the relationship awkward.  And what if you fall on hard times and can't pay the mortgage?  Now you have a foreclosure/short sale on your credit and they get kicked out of the house.  I don't mean to sound so gloomy; I think it's great you want to help your parents but it's important to realize the full extent of the possibilities, both good and bad.

    I think you should continue convincing your parents to sell and rent.  It's really not a terrible position to be in, assuming they can walk with $50k.  As for the RE agent, take his/her advice with a grain of salt.  Agents don't get paid unless a sale happens.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    The other thing to look at is the pattern here.  Your parents short sold property in 2008 and can't afford their current mortgage on their primary residence today.  There are recent income issues.  You would never go into business with people who came to you with this scenario.

    If there are proceeds after the sale of the house, have them put it in the bank and regroup by renting a few years.  2 years of steady income history and downpayment money in the bank will allow to them qualify for a decent mortgage  

    1Reply
  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
    12y

    I agree @Anne Wallace and @Bryce Y.  (and several other here).  Keep working on your folks to shed the "we're homeowners" persona and find them a great rental... you can paint the vision of how they don't have to lift a finger to maintain the place.

    Good on you for wanting to help family.  It could work out OK, but I've heard enough advice, and war stories, to keep me away from those situations... even though I too believe it would probably be OK with my family, it's just not worth the risk of souring important relationships.

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  • Account Closed
    OP
    Irvine, CA · Member since 2014 · 22 posts · 5 votes
    12y

    I know I am responding late, but BP never notified me of additional postings here.

    I was able to make it through to my parents that buying a new house is not an ideal situation for anyone. They agreed and were ready to sell and rent. I spoke to my dad and he worked a deal out with the state to regain his pay from his previous place of employment so he will be making 5500-6000 /month, just enough to cover the 3400 mortgage but will definitely make it difficult for them to live with a majority of the income going to mortgage, bills, taxes, etc.  

    I then went to the banks  explaining the situation and they explained they would be willing to due a loan modification and they gave me a rough estimate that the monthly payment would be reduced to 1800. Nothing set in stone as they want to speak to my father directly since he is the loan holder (he is currently out of town for job training/orientation work). The term length, interest rate, etc are not set either until they speak with him (I was surprised they even discussed what they did with me.) On top of that we usually rent out 2 rooms for $500 each bringing the total down to about 800.

    Right now we are hoping the loan providers are willing to do a loan modification, so they are able to hold on to the house for a few more years until their credit builds up. Then they will be able to downsize on their own without my involvement.

    Does the loan modification seem realistic? 3400 down to 1800?

    Are there any details I/we should look out for when modifying a loan?

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