# Working the Mortgage System - Can it be done?



## Terrormaster (Sep 27, 2007)

I'm in a strange but perhaps familiar situation. I've been living in my present home since around October 2000. I landed there under interesting circumstances. Long story short the house belongs to my mother-in-law and we (the wife and I) have been renting since early 2001. 

Renting from inlaws has its perks and problems (like not worrying about being thrown on the street if I miss the 1st or even sliding a few months without payment when times were rough). But now we're looking at buying the place from them since they want to retire and get the house off their tax books (I also believe they still have an outstanding balance on their own mortgage as well).

My brother-in-law had tossed out the idea of maybe just paying them the remaining balance on their mortgage since we're family and all that. But I don't think my mother-in-law liked that idea (my spanish is almost non-existant). The house is estimated at about 170k according to Zillow.com (no official appraisal at this time). She through out a figure of 150k so we'd be doing well against that number.

We want to remodel the basement sooner than later so we were hoping we could get the place for way under value then take out a home equity loan to do the basement a few months later. 

So, my initial offer was, get the house appraised (they did repair the roof in the summer of 07 and the driveway in 06). Then subtract the amount we've already invested via paying rent over the last 7 years which amounts to around 80k in rent.

But even then I'm getting figures of around 100k or so. Using online calculators it'd still take about another 3 years or so of equity build to get enough for the basement. Not to mention adding another 700-800/mo to payout to the second mortgage (HEL).

So today I came up with a bright idea to jump through some loopholes and have our cake and eat it too. Hypothetical numbers here:

Get the home appraised, say it's valued at 190-200k. Subtract 80k for past rent investment. So that's 110-120k sale price. Next get approved for the appraised value so buy the house for 190-200k. After closing and the money wired to the inlaws, they give 80k back to us so we can invest it back in the house however we like - remodels, etc. So they still make their 110-120k and we still get the 80k for remodelling without having the equity loan. Not to mention, a 400-600 lower monthly mortgage payment.

Now shoot this plan full of holes.

The only things I can think of off hand are:
1. In-laws renig on deal and keep the money;
2. 80k deposit into our account triggers a nice little audit from uncle sam.

Start shooting...


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## Spooky1 (Aug 25, 2008)

By law your in-laws can only give you $10K each per year ($20K) tax free. Any more and they are responsible for the taxes I believe (it's an odd law). I know it's your in-laws, but I don't think most rent to own deals put all of the rent paid toward the purchase of the house (but I could be wrong). You also would need to have some down payment (particularly these days) and cover closing costs. How much will it cost to fix up the basement? If your in-laws give you a break on the price of the house then maybe you can just make the initial loan for enough to cover the purchase and the basement. The loan won't be able to be for more the the appraised value of the house though. I wouldn't be surprised if the bank wants a 20% down payment these days.


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## Terrormaster (Sep 27, 2007)

Spooky1 said:


> By law your in-laws can only give you $10K each per year ($20K) tax free. Any more and they are responsible for the taxes I believe (it's an odd law). I know it's your in-laws, but I don't think most rent to own deals put all of the rent paid toward the purchase of the house (but I could be wrong). You also would need to have some down payment (particularly these days) and cover closing costs. How much will it cost to fix up the basement? If your in-laws give you a break on the price of the house then maybe you can just make the initial loan for enough to cover the purchase and the basement. The loan won't be able to be for more the the appraised value of the house though. I wouldn't be surprised if the bank wants a 20% down payment these days.


That's an odd law indeed, I'll have to look into that? Is that a federal, state, or local law?

Well, technically its not a rent-to-own... Technically it's not anything, there's ZERO paper work on the rental agreement. She lets us stay there, I give her money and thats the extent of that.

I also accounted for a 5-10% downpayment (we're first time home buyers). 
I have no estimates on the basement since they would mean squat considering we wouldn't act on it for 1-4 years depending on how the deal goes down. National average in New England is around 70k. I know we're either gonna have to raise the house or dig deeper since we only have 6'5" ceilings and I think the national minimum is 7' - but that could be by town as well. Either way, I know that won't be cheap. Not to mention plumbing and electrical.

As for the loan, I don't think I can split how I use it. I think they loan you what the seller asks up to the appraised value minus down-payment. So if it's appraised at 190 and they want to sell for 150 I believe the bank is only gonna give me 150 tops (minus down-payment). I'm certain the purchase is handled behind the scenes by the banks.

Although technically I think that law can be skirted (the one above). If say I make a 10k downpayment, the inlaws could just give that right back to us after they've been wired the funds.


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## RoxyBlue (Oct 6, 2008)

It's a Federal law. Here is a link to the IRS discussion of gifts. The annual exclusion amount is higher now than $10,000, but regardless, talk to a realtor or a lawyer about possible tax consequences before doing anything.

http://www.irs.gov/businesses/small/article/0,,id=108139,00.html


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## Terrormaster (Sep 27, 2007)

Thanks Roxy for the info.

Other thing I forgot to mention in regards to the basement. Stairs will have to be redone - they're only 29" wide and I think the minimum is 36" - not sure if thats fed or local but my understanding is federal. Which means a wall has to come down on the main floor.


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## sharpobject (May 7, 2008)

I don't understand how you get a $400 - $600 lower monthly mortgage payment when you say that your mortgage amt will be the appraisal estimate of $190 - $200K ?? Also, I would check with your mother-in-law to first see if she's willing to give you any credit for previous rent paid. Without a prior agreement, she's under no obligation to credit your rent paid towards the purchase.


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## turtle2778 (Jul 9, 2006)

LOL, if you talk your in-laws into allowing you to include your previous rent payments as downpayment on the house let me know. I'd love to float that one by my in-laws. I'm assuming that they didn't look at your previous rental as a downpayment of any kind so you definately want to check that out. Since if they still have a mortgage it will need to be repaid and they were probably using your "rent" as payment for that mortgage. It honestly sounds to me like you are trying to pull a fast one and take advantage of the fact that they are family and evidently dont speak english. Doesn't exactly build a warm and loving family relationship or trust for that matter. Im sure they will want to help you out OBVIOUSLY they do since you are living in their house and they let you slide on rent for a few months here and there. Why not try and be as fair as possibly with them. Yes you want a good deal, but you dont want to be known as a guy who would sell out his own mother for a buck. They are retired and if they are considering selling may actually NEED that money for the future. Do you and your wife plan on taking care of them? If not then seems to me the more money they have the better. Asking them to drop the price or get a loan for full price and then they would GIVE you 80K seems morally corrupt. She would be better off selling it out right on the market and get more money to retire on than getting fleeced by her son in law for not even half of what the house was worth and then be expected to GIVE you 80k to make improvements. From everything you've said it sounds more like you are trying to work over your in-laws than the mortgage system to me.


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## Terrormaster (Sep 27, 2007)

Wow, Turtle ya got me all wrong and thats totally not the situation. But ya don't know my mo-in-law... it's ALL about the money, my wife has said it many times. If she could find a way to get the better end of the deal financially she would and has in the past. She's a really nice woman but there's a hard line between business and family with her. We've been lucky to have the breaks we've had. Also the spanish reference had nothing to do with me taking advantage of them and everything to do with them discussing things in spanish (in front of me) and leavin details out in the translation (most likely not intentional - just lost). If anyone is taking advantage of the language barrier it would be them since they understand both well enough to do so.

Anyways they've had a change of plans... Well, the damn thing had been in flux for god knows how long. Originally the idea was we were gonna buy the house early on at a reduced rate or possibly have it given to us. At least that was always the assumption given to us and what we were led to believe (again, things that could have very well been lost in translation). 

Over the last five years or so they had built a huge house in South America and also bought an apartment in a now high value area down there as well. So early last year they drop the news that they're selling their big house here in the states and that they were moving back into our house to retire (aka - the boot notice) but for only 6 months out the year then spend the other 6 months in South America.

Being the nice folks they are they really weren't gonna kick us out so they were gonna renovate this place and have us live on one floor and them another until we got the funds for a down payment on our own place. Well, they get the roof fixed and were gonna finish the attic when they suddenly stopped their plans and left things hanging for the longest. Now when they had the contractors here reviewing their plans and looking at the attic (which was to be finished as floor 2) a few issues came up that I overheard. No second kitchen or bathroom upstairs because the town would consider that leadway into a two-plex which no new construction for is allowed in town anymore. A few weeks later the inspector was in reviewing and I know darn well I heard him say that the attic could never be converted to habitable space but I missed the rest. But thats when the work stopped. 

Then around the middle of this year they offer the place to us but she wouldn't give me a price. She said to see how much the banks would loan me and she'd work with that. Now based on the picture my wife paints of her mother this just screams - let me get them for all I can on the house. I love my mother-in-law and would like to think that isn't the case. But my gut is telling me otherwise...

So finally we corner her to get a price from her which is when we got the $150k - she offered first (not me) to use the extra to fix up and do a lot of the repairs needed. But I had insisted on doing the repairs ourselves, getting the appraisal and all that stuff. Because I felt that if the money was gonna be used for repairs we might as well go with the option above because I didn't want anyone else dictating how money is spent on my house. Or for that matter exactly how much exactly would be considered extra. 

Lastly I asked them what exactly was told to them by the inspector about the attic because our plans for the house GREATLY depend on renovating that area into at least one more bedroom. This is a 2BR, 1BA house and we have one child and want another but can't because of space. I was told quite specifically by them that the only thing they were told is no bathroom could be built up there.

Now it gets more complicated (in other words - don't get yourselves in this situation). Today I did some research into the town building codes. Minimum height for ANY habitable room is 7.5 feet - attic was maybe 6' when it was partially finished (they had it gutted when the roof was done cause of THEIR planned remodel). Now it's probably 7' at the peak in the center - but only the center. Not to mention the stairs are about 8" too narrow and have to be redone as well. So looks like the roof will have to be raised (if allowed) and a wall torn down and moved out more for wider stairs. Seems that I was probably right in what I heard (I need to get an inspector out on MY terms and get the facts straight). If so that means $$$$$$ that we might not be able to dish out for years which equates to years before we can add to our family as well. My daughter is already gonna be seven years apart from the next one as it is now. Oh sure we could mortgage our souls but we'd then be living check to check and loosing the financial advantage of having another child without worry.

And now, apparently, my wife says that we're now locked in a deal because of that conversation we had with them. Try backing out of a financial deal with inlaws sometime... It's gonna be very touchy.

GRRRR


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## pyro (Oct 7, 2006)

dam - in stead of word of mouth, you need a lawyer----none of i trust you bull ****-- i bought my in laws house- she quoted a price--i told her get a lawyer and write it up, got a purchase agreement with all the do's and donts --all black and white and no one can say --i didnt say that


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## Scary Godmother (Oct 13, 2007)

TM-I don't know how much money your inlaws need to make on this sale to pay off the old mortgage, my suggestion may or may not work in your situation. I bought my parents house back in 93'. At that time it was appraised at $120,000 (now appraised at twice that!), we went to the bank to be pre-qualified and were told that we could get around $100,000. My father agreed to sell us the house for $100,000, but we still needed to put down a downpayment to avoid paying PMI. We of course did not have any money for that, my Dad sent me to his tax accountant to see if he had any suggestions. He told us that if the house was worth 120,000 and we were buying for 100,000 my Dad could put the sale price down as 120,000 and give us a 20,000 gift of equity as the down payment. This worked out perfectly for us, we borrowed the 100,000 and did not have to pay any PMI, and there were no other complications due to the gift of equity (taxes, etc.). I don't know what the laws regarding gift of equity are where you live, but it may be an option that would save you from having to put anything down and give you some equity right off the bat. Maybe you could use the $80,000 for that. I guess it all depends on your inlaws and what they are willing to do and how much they need to get out of the deal. We also got a first time home buyers loan with a reduced rate for the first 5 years, once the five years was up, we refinanced and locked in a rate, also took some of the equity to do some work. Anyway, just another suggestion. Good Luck!


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## Terrormaster (Sep 27, 2007)

Ah I see... Thanks SG... At least that would solve any down payment issues if I'm understanding correctly.

So if our house is worth 190k and she only wanted 150k from us, she could put down that the selling price was 190k and that'd be a 40k gift of equity which acts as a 40k down payment? I wonder if that would qualify for BoA's minimum 5% down to get their no-fees mortgage (0 closing costs, most waived and the rest covered by BoA) plan. 

And I did some quick research - looks like CT does allow for Gift of Equity. Thanks again!


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## Scary Godmother (Oct 13, 2007)

Hope it works out for you TM! I don't remember if there were any other particulars involved, it was 15 years ago afterall, but I don't recall any complications. If you have an accountant that you use, or even just one that you know, it would be worth asking for their expertise on this. I'm not sure about the BOA loan, but I have my current mortgage with BOA, and found them to be fairly lenient and helpful with the process. I had to go into a branch office though and deal directly with a CSR who handled mortgages, trying to deal with the people over the phone, I think they are in Florida, was not working out. Best of luck, let me know how it works out.


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## scream1973 (Dec 23, 2007)

The other thing you have to look at is not what the current bylaws are because if its an older structure ( ie stairs into the basement ) you will not be required to update to match the current bylaws only if you are performing new construction.( Like converting the attic to habitable space.

So the wall on the main floor may not have to come down to widen the stairs which would make your basement renovation less expensive as well. We live in an older home ( 50+ years old ) and many of the items in this house would not meet current by-laws but we are not required to meet the current codes on those items unless we are doing something to them or replacing/reconstructing those items


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## Terrormaster (Sep 27, 2007)

Ya, thats the problem, the stairs going down actually need some renovating. Well at the very least new hand rails and some paint. But I'd think the rails would qualify as reconstructing especially if some smart ass wanted to get technical.

My biggest concern would be the ceiling heights in the basement and attic, both below required heights.


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## Hellrazor (Jun 18, 2006)

Have you gone to the bank to discuss these issues with them? You would be surprised how the mortgage brokers at the banks are on your side. They would give you some options. 
I agree with consulting a lawyer as well. You never know what could happen and a lawyer may help with your relationship in the long run. No one should have a problem with you consulting a lawyer and mortgage broker. 
Make lists and lists of questions and options and then ask your heart out. A tax specialist may also help with figuring out options as well.


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## HibLaGrande (Sep 25, 2005)

pyro said:


> dam - in stead of word of mouth, you need a lawyer----none of i trust you bull ****-- i bought my in laws house- she quoted a price--i told her get a lawyer and write it up, got a purchase agreement with all the do's and donts --all black and white and no one can say --i didnt say that


I second this notion completely. For your protection as well as theirs, property should never be bought or sold on a handshake agreement... never. period.


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