New Creative Financing Strategy

[Christina Zimmerman]

Hey, BP Community.

I had this idea a while ago, and I'm not sure I've heard anything quite like it before. It's kind of a weird twist on seller-financing. I'm hoping I can get some advice on potential pitfalls that I may not be foreseeing, as well as advice on how to handle the pitfalls I do foresee mentioned at the end of the post. 

Here's the situation: I have a good friend of mine who can qualify for a mortgage, but does not have the money for the down payment or closing costs. As opposed to renting another year, I had the idea of gifting her the down payment money while she remains the sole borrower on the mortgage, but both of our names are on the deed. The friend will live in the home and be responsible for the mortgage, and I will help finance half or all of any repairs/updates needed (provided they are not boujee updates and completely necessary). When she has had enough time to save up for a house of her own, she will quit claim the deed to me, I will take over the mortgage payments, and I get another house for 3-5% down at an owner-occupied interest rate without being on the mortgage. This way, she gets to live in a house of her choosing (provided we both agree on the deal) for the cost of the mortgage, only, allowing her to save money on rent, and I, eventually, get another house with little money down, appreciation, and equity built-in from the friend paying the mortgage while living there.

Potential pitfalls I see and will make sure are worked out legally, upfront:
1. Can I write-off these gift down payments for tax purposes?

2. How can I get their name off the mortgage so they can qualify to buy a new home while keeping the original financing terms? (I know there are seller-financing strategies for this which I need to research further)

3. Should I have a 2-5yr term limit for when they would have to quit claim the property to me in entirety and either move out or start paying market rent?

I know I would need to make the terms of this deal as clear as possible legally, including what updates would be financed by me as well as how long the friend is allowed to live in the home. Obviously, I wouldn't want to tie my capital up forever, and would eventually want this to be a cash-flowing asset.

Let me know your ideas! Is this a flop or a gem of a strategy?

TIA!