Posted on: 31st Oct, 2007 07:09 pm
I\'ve talked my elderly parents into buying a house more suited to them (1 story, etc). They had been in their old house for over 40 years. The old house is long paid off.
Since:
- they need the proceeds from the sale of the old house to finance the new,
- they should move before winter (lots of snow there),
- it may take 8-12 months for the old house to sell in their market,
I\'d like to lend them some money as a \"bridge loan\". I\'d document this as an official loan, charge some interest, have everything signed, etc. This will be around $50K, so I can\'t just make it a gift. When the old house sells, they would repay the loan.
They asked their mortgage company about this, and the company is insisting on some paperwork from me saying that this money is a gift, not a loan.
Why would this be? It is not tied into the new house at all. I\'m not planning on trying to tie it even to the old house. As far as I\'m concerned, it will just be a loan for them to use at their discression.
I do not want this documented as a gift, since the IRS frowns on that!
Any advice? Oh - this is in Michigan.
Since:
- they need the proceeds from the sale of the old house to finance the new,
- they should move before winter (lots of snow there),
- it may take 8-12 months for the old house to sell in their market,
I\'d like to lend them some money as a \"bridge loan\". I\'d document this as an official loan, charge some interest, have everything signed, etc. This will be around $50K, so I can\'t just make it a gift. When the old house sells, they would repay the loan.
They asked their mortgage company about this, and the company is insisting on some paperwork from me saying that this money is a gift, not a loan.
Why would this be? It is not tied into the new house at all. I\'m not planning on trying to tie it even to the old house. As far as I\'m concerned, it will just be a loan for them to use at their discression.
I do not want this documented as a gift, since the IRS frowns on that!
Any advice? Oh - this is in Michigan.
Hi Bob,
I guess the mortgage company does not want to show this money as a loan because this will show on your parent's credit as debt and increase their debt-to-income ratio.
I guess the mortgage company does not want to show this money as a loan because this will show on your parent's credit as debt and increase their debt-to-income ratio.
Hi Bob,
Is your father taking mortgage to buy the new home and $ 50k will be used as down payment and closing cost? In that case, Mortgage Company is suggesting you to make the $50K as gift; otherwise it will become as your fathers debt. As a result your father has to pay more interest rate.
Thanks,
Larry
Is your father taking mortgage to buy the new home and $ 50k will be used as down payment and closing cost? In that case, Mortgage Company is suggesting you to make the $50K as gift; otherwise it will become as your fathers debt. As a result your father has to pay more interest rate.
Thanks,
Larry
Given the amount of the suggested "gif", there could be gift taxes now and on the round trip. Also it's never a good idea to commit fraud.
If it is necessary to avoid counting the payments on the bridge loan, most brokers have access to bridge loan programs that do not necessitate inclusion of this debt in the underwriting ratios. Loan does have to be from a lender (i.e., not a private individual) and touch certain other bases – typically no monthly payment for between 2 and 6 months.
If it is necessary to avoid counting the payments on the bridge loan, most brokers have access to bridge loan programs that do not necessitate inclusion of this debt in the underwriting ratios. Loan does have to be from a lender (i.e., not a private individual) and touch certain other bases – typically no monthly payment for between 2 and 6 months.
"they need the proceeds from the sale of the old house to finance the new,
"
"It is not tied into the new house at all. "
These statements contradict themselves. You stated that they need the money for the new house. If it is for their down payment the bank will source (find out where it is from) and season (how long they have had the funds) the money to find out where it came from and how long they have had it. If it is a loan from you then it is not a true down payment from their money. What they are saying is that since you are a family member if you gift them the money they will qualify but if it is a loan they will not. I know it is confusing but that is the way down payments work.
If you have any questions I would be happy to try and explain with more detail.
"
"It is not tied into the new house at all. "
These statements contradict themselves. You stated that they need the money for the new house. If it is for their down payment the bank will source (find out where it is from) and season (how long they have had the funds) the money to find out where it came from and how long they have had it. If it is a loan from you then it is not a true down payment from their money. What they are saying is that since you are a family member if you gift them the money they will qualify but if it is a loan they will not. I know it is confusing but that is the way down payments work.
If you have any questions I would be happy to try and explain with more detail.
Thanks to all for the replies. It's been nearly 13 years since I've been involved with the mortgage market, other than simply paying on mine! I'm trying to catch up with this whole business...
I see the issue now - a personal loan is counted as debt against my parents, which affects their debt:income ratio, qualifying interest rate, etc.
I have the funds to help them, I'd like to help them, I just need to figure out the best way to do it. Their net worth is relatively modest, but they pride themselves in their independence, and they really would not feel good accepting such a big gift.
Brainstorming some options:
1) Just go the pure gift route. From what I've read, the most I can give them as a gift is $22K (I'm married) per year. If I did $22K in 2007 and again in 2008, that would give them $44K, which is probably close enough to get them moving. But it's a gift, and would leave them feeling funny about it. Plus, I would technically be out $44K!
2) I could buy the old house from them, keeping it on the market. I sells when it sells. They get the funds they need quickly, I get the money back when the house sells. We'd have to work out something with the realtor so we don't end up "double commissioning".
3) Anything other creative ideas out there?
I'll have them inquire about a real bridge loan with their mortgage provider.
Thanks again!
I see the issue now - a personal loan is counted as debt against my parents, which affects their debt:income ratio, qualifying interest rate, etc.
I have the funds to help them, I'd like to help them, I just need to figure out the best way to do it. Their net worth is relatively modest, but they pride themselves in their independence, and they really would not feel good accepting such a big gift.
Brainstorming some options:
1) Just go the pure gift route. From what I've read, the most I can give them as a gift is $22K (I'm married) per year. If I did $22K in 2007 and again in 2008, that would give them $44K, which is probably close enough to get them moving. But it's a gift, and would leave them feeling funny about it. Plus, I would technically be out $44K!
2) I could buy the old house from them, keeping it on the market. I sells when it sells. They get the funds they need quickly, I get the money back when the house sells. We'd have to work out something with the realtor so we don't end up "double commissioning".
3) Anything other creative ideas out there?
I'll have them inquire about a real bridge loan with their mortgage provider.
Thanks again!
Hi Bobbb,
I like the second option that you have stated. I feel it will be better if you buy the home now as your parents need quick cash to finance the new home. And when the market is doing good, you can sell the house at a suitable price.
God bless you.
Samantha
I like the second option that you have stated. I feel it will be better if you buy the home now as your parents need quick cash to finance the new home. And when the market is doing good, you can sell the house at a suitable price.
God bless you.
Samantha
It turns out the IRS rules on the gift route say you can give $12k per year per person before you start to get into Gift Tax issues. Between me, my wife, and two parents, we should have the amount they need pretty much covered.
I think I will end up going that route. It's just much easier than doing the real estate transfer, then trying to sell a house from 1000 miles away.
We'll call it our gift for their anniversary. And Christmas. And their birthdays... It's not like my parents have never helped me out! :)
I think I will end up going that route. It's just much easier than doing the real estate transfer, then trying to sell a house from 1000 miles away.
We'll call it our gift for their anniversary. And Christmas. And their birthdays... It's not like my parents have never helped me out! :)
Hi Bobbb,
I guess you're on the right track. It's better that you gift your parents the funds for the down payment and the closing costs without considering the bridge loan. That's a loan after all and you need to pay for it.
A new home somewhere around christmas - wow! that's a great gift and you'll be a part of it if you gift them the money for the down payment.
Take Care
I guess you're on the right track. It's better that you gift your parents the funds for the down payment and the closing costs without considering the bridge loan. That's a loan after all and you need to pay for it.
A new home somewhere around christmas - wow! that's a great gift and you'll be a part of it if you gift them the money for the down payment.
Take Care