Sub2 Mortgage but Parents Stay in House

[John Smith]

Quick scenario: parents have about 20k left on their mortgage, paying over the next 5 years. Low income, barely break even cash flow. The house is in dire need of repairs. They don't really want to move, and we'd like to keep this house in the family.

Can I buy their house for the exact remaining balance of the mortgage using a "subject to" sale AND they remain in the property? I live out of state, I would not reside in this house as a primary residence, and would not be charging them rent. My goal is to free up their cash flow each month that they could put towards repairs.

My first concern is: is this legal? My parents get to stay in a house while I pay their mortgage, I get the deed and an asset for 20% of the market value - "arms length" red flags come to mind here. Are we crossing a line here with the fact that they'll still be occupying the property? Since I'm not applying for any sort of traditional mortgage, investment or otherwise, do any of the qualifications (credit score, debt/income ratio, it not being my primary residence) come into play here?

To me, there has to be a catch. I'm basically getting a $100k house for $20k? What are the tax implications for me or my parents?

I'm aware of the risk of the bank calling the loan.

[Doug Pretorius]

@John Smith No problem at all. You're basically describing what's called a Sale-Leaseback (if you want to do more research on it) except you're not going to charge your parents any rent.

There shouldn't be any tax implications for your parents since they're not making anything on the sale. Presumably you will have to pay capital gains if you ever sell it.

With that much equity you also won't have a problem if the bank ever decides to call the loan. If you have a job you should easily be able to refinance, or get a HELOC on your primary residence and pay it off.

Credit and DTI have nothing do to with sub2's. That's the whole point, the loan stays in your parent's names.