From: "Jeff Strickland" 
Newsgroups: alt.org.natl-assn-mortgage-brokers
Subject: Re: Buying a house from father and having him finance mortgage
Date: Mon, 16 Aug 2004 10:06:35 -0700

The only "problem" I can see with having your FIL carry the note is that if
things should get ugly for any reason, you will have your FIL in the
picture. Other than that, I think if he can carry the note, you should allow
him to.

I assume the structure would be something of an Interest Only note (this is
the common structure of owner carry-back financing). You do not pay anything
towards the principle in this kind of loan, all you pay is the interest that
is due. On a $520k loan amount, the interest due at 6% would be $2600 per
month. If you managed to rent rooms for 1300 each, as you suggest, then you
only need to rent two of them to break even.

A few advantages of buying from a family member (father in law), is that you
can get on the Grant Deed with what is called a Quit Claim Deed. The quit
claim gets you and your wife on title along with your FIL. Later, you file
another quit claim and take the FIL off of title. This creates a transfer
that is transparent to the county, and the effect is that you can avoid
getting a new tax assessment, and therefore you can retain the tax base of
the FIL. Let's say his tax base is 288k, his taxes are 300 per month.
(288,000 x .0125 = 3600 / 12 = 300) Your tax base on the 520k sales price
would soar to 6500 per year, or 542 per month (520,000 x .0125 = 6500 / 12 =
541.67). Technicaly, the transfer takes place without a transfer but a
series of quit claim filings. It is legal because the FIL is retaining an
interest in the property, and he is also giving you an interest in the
property that you do not hold today, and you gain this interest with the
quit claim. Eventually, he will no longer have an interest, so you use
another quit claim to take him off, or simply sell the property, pay off the
note the FIL holds, and take whatever profit may remain.

If I run a scenario on the sale that gives you the 80/10 (80% 1st trust
deed, and a 10% 2nd trust deed), the payments (PITI) come to 3012 per month
on an interest only loan using representative rates that assume you have
good credit, and so on. The actual rates will probably vary, but all I am
trying to do is get my arms around what it is we are looking at. In any
case, the house payment itself consumes 45% of your income, and you will not
qualify. Sorry.

You will not be allowed to use the rental income from renting rooms because
there is no history that you have acutally made any money doing this becasue
most people that do this sort of thing do not claim it on taxes, and you
have not actually done it yet so you have no income to show relative to this
practice.

Here is an option that I might suggest. Have the FIL get a loan today for
80% of the Sales Price. He should get it as an Interest Only. You and you
wife make the payments AND KEEP THE CANCELLED CHECKS. Your FIL files the
quit claim to bring you in on title. In two years, you and your wife get
your own loan for the purchase price, which should be about 80% of the
appraised value at the time, you need a 650k appraisal. You pay off the FILs
note, and give him the remainder. The FIL is out of the picture, and he
isn't on the new loan nor is he on title. You continue with the tax base the
house enjoys today because the transfer is completed with a series of
refinances instead of a sale. (Two things can trigger a new tax assessment -
a sale (transfer to a new owner) or a building permit.) The quit claim adds
or subtracts people from title, it is not a transfer instrument. In the
first instance, the county sees the owner plus two new names. No transfer,
so no assessment. In the second instance, the county sees the list of
owners - three at this time - become shorter. This is also not a transfer,
so there is no new assessment. You use the cancelled checks as evidence that
you have been paying the mortgage because a lender is going to want mortgage
history to be verified, and you are not on the loan so you will need those
cancelled checks to verify that you have in fact been paying the mortgage.

The loan that the FIL takes out is a 3/1 ARM, since you are going to
refinance it again later anyway. He takes it as an 80% to avoid the mortgage
insurance. You can also take an 80% loan, and the FIL gives you a 20% Gift
of Equity. This means that he gives you the equuity that he has built up.
You still get the 80% loan, and in a few years you take out a new 80% loan
and give his gift back. In order for this strategy to work, he has to write
a letter that says he is giving a gift of equity that he does not expect
repayment on. You can repay his kindness if you want, but he can't demand
it.

I can also get you an Option ARM loan. This is an adjustable rate mortgage
that is tied to the 11th District Cost of Funds. Basically, as long as you
believe that storing your money in a passbook savings account is not a very
good idea, this index creates a favorable mortgage rate. I am writing these
loans today at below 5%, fully ammortized. It is called an Option ARM
because each month you get to exercise an option to pay the minimum payment
(this is generally a negative ammortization, where the loan principle
actually grows), OR you can make an interest only payment, OR, you can make
a 30-year payment, OR, you can make a 15-year payment. The caps are based on
what happens to the payment, not the rate. Consequently, the rate cap works
out to be very low, well below 1%. The payment cap is 7.5%, so if your
payment was 1000 in the first year, it would be 1075 in the second, and 1156
in the third, etc. and so on. Of course, the payment can go up or down,
depending on where the index goes. I have this loan on my own home, and my
rate today is below 5%. My wife makes the 15-year payments, and she has
chipped away over 9000 in principle in less than one year. We are on pace to
have cut the principle by nearly 14,000 after 1 year. And, I can do this
loan to 90% of the sales price with no mortgage insurance, and no confusing
2nd mortgage terms.

Jeff Strickland
City Mortgage Services
(800) 310-8488
(858) 217-2449 Direct
jeff at citymortgage dot net







"haroldact"  wrote in message
news:7abace77.0408132320.34b98d74@posting.google.com...
> My wife and I will be purchasing a house in Northern California from
> my father-in-law and have been looking for a good loan.  The price for
> the house is $520,000 and we have a pretty good sum of money saved up
> ($80,000) for a down payment and closing costs.  My wife and I don't
> make a huge amount ($80,000 combined) but we will also be renting out
> 3 of the rooms for approx. $1300/month.  I've been told that we should
> be going with a 3 or 5 year ARM since we would like low monthly
> payments and are likely to move in a few years.  We had spoken to a
> broker who said we should do an 80% first and 10% second in order to
> save on mortgage insurance. My father-in-law has said that he would be
> willing to handle the entire loan, since he would be getting very
> little return on his money if he took $530,000 and stuck in in a
> savings account.  My questions are, how do we go about setting an
> interest rate?  Are there any disadvantages of going through a
> relative rather than a bank of broker?  I know the obvious one of
> defaulting on the loan, and we've discussed this and don't think it
> will be a problem.  If anybody can give some insite on these questions
> or any other advice on financing this property, it would be greatly
> appreciated.  Thanks!
>
> Harold