Using gifted house to acquire another situation?

Question

Hey all,

I have been trying for a couple of months to figure this out on my own and would like some input please. This is the situation.

I am being gifted my mothers house which is paid off. I’d like to move her closer to me as the house is located in Wisconsin and I live in Minnesota. I’d like to do the following:

- Take the 220k paid for house and take out a mortgage of 150, getting a rental agreement for it also which would likely be about $1400 a month

- Use 100k to pay down almost all of my current debt and reduce my DTI (besides mortgages)

- Use the 50k left over from the mortgage to put down 20-25k on a house close to me for my mother to live in (200k house or so) which I would then own and let her live in for nearly nothing until she passes (not in near future).

Is this possible to do? Household income is about 200k and after the first step listed above we would have a 350k current mortgage (450k house) for our primary residence, 150k on the 2 rentals and a 60k student loan if this is at all possible. It appears the DTI should be okay from what I can tell but would any lender approve something like this? If so who do I start with? Any lenders I should try? It's hard to figure it out but I think it is worthwhile to try to end up with 2 properties if possible. I think doing it this way gets rid of a lot of possible tax issues too. Hopefully I've made it clear enough and I so greatly appreciate any help?

Casey Martin · Answer

Hello and thank you for your help here. I could acquire cash reserves in relatively short order; we have used our income to attack debt and reduced our by quite a bit in the last several months with hopes of doing this so it could be redirected to getting cash reserves or whatever is needed in short order I believe. It is excellent to hear that there is something that would allow for this. I will contact you via PM later today. Thank you!

Casey Martin · Answer

Hello,

Thank you so much for the reply.

1. I am planning on doing exactly that and not charging her a dime; I agree with you 100%! I meant that she plans on paying a small amount just for property taxes is all but this doesn't need to be done if it complicates things.

2. To simplify the situation I stated it as thought it was done but in face it had not been done yet, I wanted to seek advice prior.

Bryon Andrews · Answer

@Sarah Meres any thoughts on this?

@Casey Martin I recommend checking in with your CPA as well to discuss any tax implications. Also, do you have a plan for renting the house in WI? Specifically, is it close enough for you to self manage or will you have someone in the area helping you? I think you have a solid plan with the gifted house and money. Best of luck!

Sarah Meres · Answer

Thanks for tagging me, @Bryon Andrews!    @Casey Martin - lots of great advice came through today. I love what you're doing for your mom and I feel what you're looking to accomplish is quite doable! I would be happy to chat on the phone about how to work out the loan details. Tim is a great lender in the area as well! I'll PM you my number if you just want to do some brainstorming :)

Dave Skow · Answer

@Casey Martin- thanks ....once the property is in your name - doing a  cash out refinance on it  should be  possible  ( assuming you qualify ) ....make sure that the  parties that  are  assisting  with the  gifting process are  aware of what your plans are  and  you should also connect with an accountant  regarding any  possible tax  issues that might be involved

Stephanie Medellin · Answer

For conventional loans (fannie/freddie guidelines), yes, the 6 months would apply.  There might some lenders that don't have that requirement, but I find that most do, even if they have more lenient guidelines.  If your Mom stays on title and just adds you, you could qualify right away.

I should have clarified that if you do not actually need the rental income to offset the payment to qualify, you don't necessarily need to show a lease.  So maybe you complete the refinance on your Mom's current house first, pay off debt, and get the down payment funds.

Once she is ready to move and you go under contract to purchase the new house, then you could find a tenant and sign a lease, which would help offset the payment on the Wisconsin house.

Casey Martin · Answer

This is excellent and I greatly appreciate your detailed assistance!

1. Does the 6 months apply in every instance? The home hasn't been transferred yet and I see some people saying to not do it this way so I am wondering if you think this route is best (using likely a quitclaim deed) or would another route be better? Also, could I use a signed lease and security deposit for say 1-2 months away so my Mother could stay living there until the house here was purchased so she wouldn't have a find a rental in between? To clarify, could I line up a tenant if it was right now for say Oct 1st and use the lease and a deposit to then proceed on the home for my mom?

2. My Mother is on social security only and makes $1500 a month living as a widow with no other debt but I can't imagine the would qualify her for a 220k mortgage because in reality there is no way she could pay that. I didn't know about that possibility so that is exciting!

Thanks again, literally this is the best community!

Casey Martin · Answer

I greatly appreciate your detailed reply, thank you.

1. Sounds like a excellent idea, I will check into that.

3. I did not know that was not possible and I hadn't thought of using it to purchase more property but that seems to make sense too.

4. Our current house has a 5% conventional mortgage currently if that is what you are referring too for our personal home it just now has about 100+ plus is equity.

Stephanie Medellin · Answer

@Casey Martin  The comment above about your Mom selling tax free is definitely something I'd take into consideration if nothing has changed hands yet.

From a mortgage perspective, it sounds like you might have enough room in your DTI to make this work if you don't have much other debt besides the student loan and the mortgages, although I have no idea what your current interest rate is, or your property taxes / insurance, or whether all your income can be counted.  For that, you'd definitely need to talk to a loan officer licensed in your state to review your financials.

Here's what I'd suggest:

1.  Cash out refinance on the gifted home - you will need to be on title for 6+ months to qualify for a conventional cash out refinance.  You can borrow up to 75% of the value for a cash out refi, and can use 75% of the rent to qualify.  You will typically need to show the lease and first month rent / security deposit to use this income before it's reported on your tax return.

When refinancing, any debt that will be paid off with the loan proceeds can typically be omitted from your debt to income ratio.

2.  If you can show that your Mom has insufficient income to qualify for a new mortgage, you may be able to take advantage of Fannie Mae guidelines that allow you to buy a home for your parent(s) as a primary residence.  This will allow you to put a minimum of 5% down and you would get the better owner occupied loan interest rates.  Since you would not be buying this as an investment property, you cannot use any rental income to help qualify for the purchase loan, and you would need to qualify this additional mortgage payment (principal, interest, taxes, insurance, HOA).  If you buy as an investment property, rates will be higher and you will need a larger down payment.

So, first you need to be on title to your Mom's home for 6 months.  Then it needs to be leased, then you can do a cash out refinance.  Once you have paid off your debt, have the home leased and you have your down payment funds, you can buy the new home for your Mom to live in.

Obviously before taking the first step, consult with a tax advisor to see if they recommend a better option, and also consult with a loan officer to plan out the scenario to make sure you will qualify for each loan.

Using gifted house to acquire another situation?

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