mom considering buying a condo. sister will rent. mortgage or no ?

[mh]

my mom is considering buying a condo that my sister will rent.
so the question is mortgage or no ? she could theoretically just buy it outright (~ 130,000)
but i'm thinking getting a mortgage with a largish? down payment might be the way to go.

some info:

1) sister (single 57yrs) is very reliable and can meet the mortgage payments + HOA + plus a bit for maintenance.. she's a tenured prof.
and is in an apartment which is isn't horrible but it's not great either ( think student style apartments)
i don't want to go into the details of the obvious question as to why she's not getting the mortgage.
please just go with the assumption that it's not an option.

2) mom is 83. no debt. owns so cal house debt free that she lives in w/ my brother. good credit score 750ish probably

3) has around 1.175 M about 150,0000 of it in cash. i was reorganizing her assets so i sold a big chunk of equities around jan 1 ( yes i am a genius )

4) the place being looked at is ideal for her. walking distance to the univ. bldgs. good location in city center. she can close it up during the summers if she wants.
just the right amt of room for her (2bd 2ba loftish style) . she usually stays with mom in the summers.

5) It's very unlikely we'd sell it for at least 10 years. she's likes her job and will likely keep working at least 10 yrs. after that, who knows.
if her health is still good she'll probably keep working


So:

what are her chances of my mom getting a mortgage?
any advice about how to go about it ?
rates are low and i'm guessing people are not lining up for mortgages
right now so maybe now is a good time as far as her chances go?

anyone with some advice/opinions would be welcome . thanks.

 

[jazz4cash]

I thought people WERE lining up to refi. I would get the mortgage because rates are so good right now. I’d approach a loan rep about buying a place for daughter and mom. You might need to arrange monthly transfers to a liquid account to satisfy the income requirement. Lenders should follow the Fannie/Freddie rules for asset backed loans but I think many lenders avoid them out of ignorance or incompetence. By all means get the condo for DS even if you have to use cash.

 

[The Cosmic Avenger]

Yeah, it seems like right now, all signs point to "borrow and reinvest the equity".

 

[troutnut1]

Spent my career in real estate investing, lending, and appraisal. But retired now so my ideas might be a little dated. Forgive me if I bring up some negatives you might, or might not have thought about. Better to hear it now than have to write to the Moneyist when this all blows up...

1. I would guess that lenders are pretty busy right now, and if they aren’t they will be real soon as the entire country refinances. I lived through that as a lender after rates came down 30 years ago and it was a nightmare. I expect that again.

2. Conforming loan guidelines in the past did not allow rental income to be counted unless at least two years experience as a landlord could be verified. Since this will not be your mom’s primary residence, she may need to qualify for the entire payment, taxes, and HOA. That may be possible given her financials, but it will be a challenge to document.

3. When you buy a condo you are buying a big package in addition to the unit itself. It is prudent to check income of expenses of the HOA along the way.I would want to see, or do my own, reserve study to make sure reserves are adequate for upcoming expenses. “Special assessments” are not uncommon. Neither are pending lawsuits or upcoming lawsuits. Many HOA’s prohibit rentals, or only allow a certain percentage to be rental. I wanted to rent one I inherited a while back but I would have had to get on a waiting list for years to become eligle to rent it out. Many lenders also have certain requirements for HOA’s before they will make a loan. # of units. Occupancy of rentals s owner occupants, etc. Inquire sooner rather than later about this.

4. For some very good reasons, lender’s do not care for loans where the borrower doesn’t have any skin in the game (down payment). What would sister provide as “skin in the game”. What’s to stop her from walking because someone on the other side of the wall makes too much noise, or the HOA ticks her off? These are common problems in condos. Patience and tolerance are required.

5. What happens if mom needs to spend down assets to qualify for Medi-Cal, etc. I know California has lots of laws dealing with this, and things such as “asset protection trusts”, but I’d be figuring that out as part of the deal too to prevent surprises later.

6. Another possible way of approaching this might be with what I used to call an “Einstein Loan” (where everyone is a relative, “theory of relativity”). Maybe sis could get a personal loan of some type for a down payment, and mom carries the balance secured by a note and deed of trust. Further provisions could provide for a refinance down the road. Or not. That would allow mom decent interest (check with the irs regarding “imputed interest” rules, and sis could be an owner now. The down payment wouldn’t even need to be in cash. It could be a paid off car title, loan on a business, deed of trust on other property, etc.

Hope this helps.

 

[pb4uski]

Here's another option that perhaps you may not have thought of. Sister buys condo and mom provides financing in form of mortgage that is duly recorded at the county. Mom arranges with a bank to service the loan. Sister pays the bank just as she would if she bought the condo, bank deducts servicing fee and remits remainder to mom. If sister defaults, mom accepts a deed in lieu of foreclosure from sister or forecloses if sister is uncooperative. In this case, mom's asset is the mortgage loan on the condo rather than the condo itself and mom receives interest instead of rent. Sister has incentive to make it all work.

Or alternatively, sister buys condo and mom cosigns on mortgage and provides downpayment if needed. If sister defaults, then mom steps in and cleans up the mess... paying off mortgage in exchange for sister signing condo over to mom.

On the path that you are on the mortgage will have a higher mortgage rate since it is for investment rather than personal residence.

 

[Sunset]

Here's another option that perhaps you may not have thought of. Sister buys condo and mom provides financing in form of mortgage that is duly recorded at the county. Mom arranges with a bank to service the loan. Sister pays the bank just as she would if she bought the condo, bank deducts servicing fee and remits remainder to mom. If sister defaults, mom accepts a deed in lieu of foreclosure from sister or forecloses if sister is uncooperative. In this case, mom's asset is the mortgage loan on the condo rather than the condo itself and mom receives interest instead of rent. Sister has incentive to make it all work.
.....

This is how I bought my first place, when mortgage rates were 17%
Mommy the bank provided the mortgage , a real mortgage with a lawyer, and Mommy Dearest said she would foreclose if I didn't pay.
It was great as I owned it.
Mommy didn't deal with being a landlord (taxes etc..) and she got a good interest rate.

 

[TheShadow]

Sister

This “the sister”
Thanks for the alternate ideas
As my brother said, I can’t formally be part of any financial arrangement (long story), but I have an income and need to pay rent to someone so why not mom

 

[pb4uski]

.... need to pay rent to someone so why not mom

(emphasis added)

Does it have to be rent? Or could it be a mortgage payment?

 

[Sunset]

This “the sister”
Thanks for the alternate ideas
As my brother said, I can’t formally be part of any financial arrangement (long story), but I have an income and need to pay rent to someone so why not mom

I'm guessing the sister has been sued and if she were to own the home, it would be seized.

 

[mh]

(emphasis added)

Does it have to be rent? Or could it be a mortgage payment?

It would be rent in that she can’t carry the mortgage. She would give my mom money for “rent” but my mom isn’t looking at it as a rental property. We would probably sell it if if sister were to no longer live there ( an unlikely event in the foreseeable future )

 

[mh]

I'm guessing the sister has been sued and if she were to own the home, it would be seized.

She has no debt, bankruptcy, divorce , or other typical bad credit history things in her past, but she can’t get a mortgage. I understand it’s weird / mysterious , but I don’t want to go into it here.

 

[pb4uski]

It would be rent in that she can’t carry the mortgage. She would give my mom money for “rent” but my mom isn’t looking at it as a rental property. We would probably sell it if if sister were to no longer live there ( an unlikely event in the foreseeable future )

What do you mean by "she can't carry the mortgage"?

One interpretation would be that she can't afford mortgage payments but that doesn't make sense in that you both say she can pay rent.

I suspect that you mean that for some mysterious reason that she cannot be a borrower.... even if the lender is the Bank of Mom.

 

[ivinsfan]

I'm guessing the sister has been sued and if she were to own the home, it would be seized.

That's a guess and maybe not correct. What does the reason matter anyway?

Mom seems to have ample funds, so the question is just how can they make it happen.

I'd just find a broker, start the paperwork for the loan and see what happens. You are not talking about a ton of money here.

 

[mh]

pb4uski, your assessment is accurate. she can't be a borrower.

as ivinsfan had posited. we're going to see if the loan can be made to happen with mom.
if not, we may just buy the thing for cash.

 

[Sunset]

pb4uski, your assessment is accurate. she can't be a borrower.

as ivinsfan had posited. we're going to see if the loan can be made to happen with mom.
if not, we may just buy the thing for cash.

OP - you don't need to say why sister cannot borrow from a bank. This is a public place after all.

When my Mom loaned the money to me to buy my first place, it was done via a lawyer drafting up a legal mortgage, which was registered (same thing as a bank would do).
I did pay Mom directly instead of having a bank service the mortgage.
Mom had the power (from the mortgage to foreclose, just like a bank).

When I paid off the mortgage to Mom, she signed a document saying it was paid off, and we registered the mortgage discharge (same as a bank would do).

How the flow worked for me:

1. Mom & I agreed on mortgage amount and rate (including $2K for possible legal costs).
2. I looked at places and bought one conditional upon financing.
3. We went to Lawyer who wrote mortgage up
4. few days before closing, Mom & I went to lawyer, each with their money (Mom with mortgage amount, Me with downpayment).
5. Property closed and I got the keys.

 

[cathy63]

It would be rent in that she can’t carry the mortgage. She would give my mom money for “rent” but my mom isn’t looking at it as a rental property. We would probably sell it if if sister were to no longer live there ( an unlikely event in the foreseeable future )

Is this going to be an arrangement where TheShadow doesn't claim renter's credit on her CA tax return and Mom doesn't report the "rent" as income and file schedule E on her Fed tax return? If so, then it's more like a second home owned by Mom and she lets TheShadow live there. The money Mom gets from her daughter in this kind of transaction is a gift that should stay below the gift tax exclusion limit, which is currently $15K/yr.

Mom should just visit a mortgage broker and start the process of applying for a loan for this second home. A broker will be able to tell her if there are any obstacles that will prevent the loan from going through. She'll need a bigger down payment than she would for a primary home and the interest rate will be a bit higher. The property tax and mortgage interest is deductible on her tax returns, but she still may not have enough to itemize on her Fed return.

If she treats it as a real rental property and charges fair market rent, then she could deduct depreciation, HOA fees, repairs, etc.