Buying a house for an adult child (child adult?)

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mundart
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Buying a house for an adult child (child adult?)

Post by mundart »

Our son and daughter-in-law both have good jobs but insufficient credit scores to buy a home. They are currently renting. They do have enough savings for a 20% downpayment on a new house. We are considering buying the house ourselves in our name using their downpayment. Then renting it to them until at some point they could assume the mortgage in their own name. We just retired and have no debt. They have agreed to make all payments related to the purchase, mortgage payments, repairs, etc so that we would, in theory, not have to pay anything. I know that this could very well end up badly if the payments are not made by them. Any suggestions as to what legal instruments (besides common sense) we might use to protect us against default?
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Jazztonight
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Re: Buying a house for an adult child (child adult?)

Post by Jazztonight »

Mike Tyson, that brilliant philosopher, once said that "Everyone has a plan until you get hit in the mouth."

Sadly, there is some truth to this.

When I was just starting out, my father "loaned/gave" me and my wife a down payment for a house we bought. A few years later, my then-wife and I divorced. She got to keep the house, and I "kept" the "loan," which I eventually paid back to my Dad.

This kind of stuff happens. A lot.

Think of the worst case scenario: your son has to leave the house, and your d-i-l winds up staying there--in your house. I've seen it happen.

You'll probably wind up doing this (because it's the "right" thing to do). But beware. Just sayin'.

(PS--I did not have a "pre-nup" for my first marriage. I do for my second.)
"What does not destroy me, makes me stronger." Nietzsche
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snowshoes
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Re: Buying a house for an adult child (child adult?)

Post by snowshoes »

Not advised, your right, common sense. Good luck!
KeepItSimple78
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Re: Buying a house for an adult child (child adult?)

Post by KeepItSimple78 »

Unless you are in a very comfortable retirement situation, I would think twice about getting involved. There's absolutely nothing wrong with your son and daughter-in-law continuing to rent until they can rectify their credit situation.
Avid reader of personal finance/investing literature; however, no formal training in this area. My comments are always well-intended, and most often well-informed.
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Wildebeest
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Re: Buying a house for an adult child (child adult?)

Post by Wildebeest »

KeepItSimple78 wrote:Unless you are in a very comfortable retirement situation, I would think twice about getting involved. There's absolutely nothing wrong with your son and daughter-in-law continuing to rent until they can rectify their credit situation.
I Agree.
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Re: Buying a house for an adult child (child adult?)

Post by bayview »

Unless they have something truly awful on their credit reports (a judgment, for instance), they should be able to clean up their credit scores within two years to qualify for a mortgage. They already have the 20% downpayment saved.

I have found that it is incredibly important for people to fix their own poor credit via permanent changes in behavior, especially before taking on something like a house. It's both empowering and important in increasing the likelihood that they will be successful homeowners when they do buy.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
joebh
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Re: Buying a house for an adult child (child adult?)

Post by joebh »

mundart wrote:I know that this could very well end up badly if the payments are not made by them. Any suggestions as to what legal instruments (besides common sense) we might use to protect us against default?
Your lawyer can draw up an airtight loan agreement. But these agreements are only as good as your willingess to enforce them.

Are you ready to sue your son, and potentially throw him and your grandchildren out into the street if necessary?
If not, don't do this.
wallygator
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Re: Buying a house for an adult child (child adult?)

Post by wallygator »

HI,

Don't do it. Sh stuff happens. Having 20% deposit but bad credit seems strange. Help them fix their credit and earn the house.

Good Luck,

Wally
GoldenFinch
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Re: Buying a house for an adult child (child adult?)

Post by GoldenFinch »

You are wading into a potential mess. Let them stand on their own feet, fix their own credit problems, and buy their own house themselves. In twenty years, they might thank you.
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Re: Buying a house for an adult child (child adult?)

Post by TheGreyingDuke »

A dissenting voice here, if you can afford it and think they are responsible (why do they have a lousy credit rating??), my tradition tells me to go ahead and do it. I often find myself dissenting from these sort of queries on this forum, thinking that my role as parent never ends, even when the tie comes they are wiping the drool off my cheek.

When I was starting out I got some help from my folks; we had built our own house, with our own hands, when I was 30 years old. When we sold it six years later and needed to move elsewhere with higher housing costs, my father got us a loan from his bank (the loan was in our name)and he held a CD at the institution for the amount of the loan. As it wasn't a mortgage, it lacked deductibility nor did it have a payment schedule. Every month I sent in as much as we could and had it paid off in a little over three years.

Some cultures eschew the "tough love" sentiment prominent in these parts; I think with the properly executed paperwork you could go ahead, that's as I see it. Only you know best your children and their situation and your ability to help them out.
"Every time I see an adult on a bicycle, I no longer despair for the future of the human race." H.G. Wells
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jimb_fromATL
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Re: Buying a house for an adult child (child adult?)

Post by jimb_fromATL »

mundart wrote:Our son and daughter-in-law both have good jobs but insufficient credit scores to buy a home. They are currently renting. They do have enough savings for a 20% downpayment on a new house. We are considering buying the house ourselves in our name using their downpayment. Then renting it to them until at some point they could assume the mortgage in their own name. We just retired and have no debt. They have agreed to make all payments related to the purchase, mortgage payments, repairs, etc so that we would, in theory, not have to pay anything. I know that this could very well end up badly if the payments are not made by them. Any suggestions as to what legal instruments (besides common sense) we might use to protect us against default?
I've seen a lot of the negatives that other posters have mentioned over and over again with people I've known personally and in dozens if not hundreds of cases on the consumer forums where I hang out.

Even if you don't end up paying for a house that you don't own and even your son no longer lives in, if they have not been able or willing to pay all their debts on time all the time in order to have a good credit score, then next time they're in a financial bind chances are they will choose to pay the creditors who can hurt their credit score or repossess their stuff instead of paying the rent to you.

Be aware that very few mortgages are assumable these days, and it's even less likely to be allowed at today's low rates after rates go back up. So they'll almost surely have to get a new mortgage if and when they improve their credit score well enough to qualify for a mortgage. This will add the additional expense of closing costs -- which are typically in the range of 1% to 1.5% of the amount of the new mortgage. That's a pretty good chunk of extra cost for just a year or two that it might take to get their credit score up enough, assuming everything goes well.

Ideally, if you do go with that plan, you need an iron-clad contract spelling out all the details about how they will pay you. But as a practical consideration it doesn't really matter unless you truly have the resolve to evict your own son and repossess the house if they don't comply with the agreement.

Why do they not have a sufficient credit score?

jimb
Last edited by jimb_fromATL on Mon May 09, 2016 8:07 am, edited 1 time in total.
kithwang
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Re: Buying a house for an adult child (child adult?)

Post by kithwang »

If the goal is to teach your kid to be financial independent when you are gone, bailing him out now is not the answer.
pinecone
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Re: Buying a house for an adult child (child adult?)

Post by pinecone »

There are so many good reasons not to do this:

1. The fact that you are worried about being protected in case of default.

2. It sends the message to your son and daughter-in-law that you don't think they are capable of buying a house on their own.

3. If they've been able to save enough for a 20% down payment, they are capable of fixing their credit.

4. Before buying a house, they should have their credit fixed AND have additional money saved beyond the down payment for the inevitable extra expenses involved with owning a house.

5. Anything worth having is worth waiting for and working for. Interest rates aren't going to shoot up overnight.

6. The dynamic between you and your son/daughter-in-law will become that of "you owe me". This leads to bitterness on both sides.

7. If you want to give them something, then give what you can afford to lose with no expectations and no-strings-attached.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

mundart wrote:Our son and daughter-in-law both have good jobs but insufficient credit scores to buy a home. They are currently renting. They do have enough savings for a 20% downpayment on a new house. We are considering buying the house ourselves in our name using their downpayment. Then renting it to them until at some point they could assume the mortgage in their own name. We just retired and have no debt. They have agreed to make all payments related to the purchase, mortgage payments, repairs, etc so that we would, in theory, not have to pay anything. I know that this could very well end up badly if the payments are not made by them. Any suggestions as to what legal instruments (besides common sense) we might use to protect us against default?
mundart,

<<Our son and daughter-in-law both have good jobs but insufficient credit scores to buy a home.>>

Common sense will tell you not to do this. You are getting them into a house / lifestyle that they cannot support and sustain. So, you are NOT helping them by assuming the mortgage.

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Mike Scott
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Re: Buying a house for an adult child (child adult?)

Post by Mike Scott »

I'm generally with the let them do it themselves bunch. However, a gift of a house within their ability to maintain, insure etc is a different option.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

Mike Scott wrote:I'm generally with the let them do it themselves bunch. However, a gift of a house within their ability to maintain, insure etc is a different option.
Mike Scott,

It is not a gift in this case. OP has to take a mortgage and let his son pay for it. OP is not rich enough to give the house. OP is assuming a mortgage that his son cannot get on his own. Now, if OP is rich enough to buy the house and give to his son free and clear, that is a different kind of story.

OP is working to get his son into financial trouble. He is not helping.

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protagonist
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Re: Buying a house for an adult child (child adult?)

Post by protagonist »

About half of marriages end in divorce. 2/3 of second marriages. 3/4 of third marriages. And I would guess that 90% plus of couples believe when they tie the knot that it could never happen to them .

Consider that in your decision making.
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Re: Buying a house for an adult child (child adult?)

Post by JLJL »

Are there tax implications for them giving you the down payment for your, presumably, second home? Are there differences in property or income taxes for an investment property that is not or has not been your primary residence, particularly if they (you) sell it? Do you need to file additional forms and does this otherwise add complexity to your tax situation each year? Will the "rent" remain at fair market value, to the extent that it won't be considered tax fraud if the rent would have gone up but they kept paying the "mortgage rate" and you don't claim the difference as a gift?

I'm not trying to patronize, I really don't know the answers. But are you looking for an excuse to say no, other than offending them with the credit thing? The above might help, whether real issues or not.
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JPH
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Re: Buying a house for an adult child (child adult?)

Post by JPH »

What happens when they decide that they no longer like the house and move out?
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muddlehead
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Re: Buying a house for an adult child (child adult?)

Post by muddlehead »

I'd say go for it. Worst case. House needs to be sold because they can't afford rent, or property taxes, or home insurance, or upkeep etc ... Wasn't your 20% down payment anyway. You might lose a little money in the whole scenario. That's what parents are for. Good luck to your son and d-i-l.
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Re: Buying a house for an adult child (child adult?)

Post by jfave33 »

Normally I would be in the it is okay to help out minority. However even I would say not to do it. There are fundamental reasons for a low credit score that need to be addressed or you are exacerbating the problem. Once those are fixed then and only then can they consider buying such a large asset on credit. There is nothing wrong with renting especially when one is not in a position to buy. Have them focus on fixing their credit. They could very well mess up your credit rating eg if they miss payments and do not inform you or you do not check month to month.
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dm200
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Re: Buying a house for an adult child (child adult?)

Post by dm200 »

mundart wrote:Our son and daughter-in-law both have good jobs but insufficient credit scores to buy a home. They are currently renting. They do have enough savings for a 20% downpayment on a new house. We are considering buying the house ourselves in our name using their downpayment. Then renting it to them until at some point they could assume the mortgage in their own name. We just retired and have no debt. They have agreed to make all payments related to the purchase, mortgage payments, repairs, etc so that we would, in theory, not have to pay anything. I know that this could very well end up badly if the payments are not made by them. Any suggestions as to what legal instruments (besides common sense) we might use to protect us against default?
Many other good posts about the pros and cons of your idea.

To me, though, I wonder if there may be something else going on. It seems to me that having the 20% for a down payment is a bit unusual today - (in a good way) and that folks who can (and have) saved this much would be unlikely to have credit problems. Have you (independently of what they tell you) reviewed and confirmed the credit score "reason" for their not enabling them to get a mortgage? What are their credit scores and what are the causes of the scores being too low? Have they worked with a real estate agent and mortgage broker (or similar) to work on their being able to qualify for a mortgage?

What do they say about what they are doing and will do about "some point they could assume the mortgage in their own name"?

Was this idea of your buying them a house theirs or yours? Something about this scenario does not seem right to me.
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Re: Buying a house for an adult child (child adult?)

Post by Ybsybs »

Wildebeest wrote:
KeepItSimple78 wrote:Unless you are in a very comfortable retirement situation, I would think twice about getting involved. There's absolutely nothing wrong with your son and daughter-in-law continuing to rent until they can rectify their credit situation.
I Agree.
Absolutely. If the banks consider them a bad risk, you should too. You'd have a harder time getting your money back than the bank would.
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Re: Buying a house for an adult child (child adult?)

Post by renue74 »

There's too much exposure here for the OP. It's one thing to gift a child some money, but taking on risk with the possibility of turmoil (family splitting up, can't pay mortgage, job loss, etc.) is too great.

I've had family members who have done this and the problem is "life changes." Things change and they were stuck with a mortgage and really rocky holiday family gatherings.
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Re: Buying a house for an adult child (child adult?)

Post by Danzangdc »

protagonist wrote:About half of marriages end in divorce. 2/3 of second marriages. 3/4 of third marriages. And I would guess that 90% plus of couples believe when they tie the knot that it could never happen to them .

Consider that in your decision making.
Your statistics are outdated. The divorce rate is lower now. And among certain demographics, it is very low.

http://www.nytimes.com/2014/12/02/upsho ... .html?_r=0
Riverstwo
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Re: Buying a house for an adult child (child adult?)

Post by Riverstwo »

We have friends who have done this for their kids. It worked great at first until the parents realized that the young adults had no intention of actually working in the yard or the house because they are not the manual labor types but also did not have sufficient funds to hire anyone and the house got full of algae and the yard got overgrown and is a mess. The house now drops the property value of most of the houses around it. It would take a lot of skilled labor and money to fix that place up to get it ready to sell should their relationship end.
protagonist
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Re: Buying a house for an adult child (child adult?)

Post by protagonist »

Danzangdc wrote:
protagonist wrote:About half of marriages end in divorce. 2/3 of second marriages. 3/4 of third marriages. And I would guess that 90% plus of couples believe when they tie the knot that it could never happen to them .

Consider that in your decision making.
Your statistics are outdated. The divorce rate is lower now. And among certain demographics, it is very low.

http://www.nytimes.com/2014/12/02/upsho ... .html?_r=0
Yes, that is an interesting article.

That said, looking at the graph presented in the article, the ~15% divorce rate after 8 years for marriages that started in the 2000s is not THAT different than the ~17-18% divorce rate after 8 years for marriages that started in the 1970s-80s and higher than 1960s marriages (about 12%). The ~35% divorce rate after 18 years of marriage for 1990s marriages is not THAT different than the ~37% divorce rate for marriages that started in the 1970s-80s (all are higher than marriages that started in the 1960s). And if you go out to 27 years, marriages from the 70s-80s have divorce rates in the 45% range, and extrapolating the curves for the 1990s and 2000s marriages, the results don't seem too dissimilar. Plus. 45% after 27 years certainly seems compatible with a ~50% lifetime divorce rate.

As for the effect of college education, the only statistic quoted in the article is that after 7 years of marriage, college-educated couples who married in the 2000s had a divorce rate of "about 11%". The graph shows an overall divorce rate after 7 years of marriage of those married in the 2000s of about 12%. Is that a statistically significant difference, and how much of a difference would that translate to over longer periods of time?

So, just based on their own data, I think the NY Times is overstating their conclusion. My take on the graph is that divorce rates have remained relatively steady with small differences over time, and they are compatible with a lifetime divorce rate close to 50%.

And regardless of whether or not it is lower in the OP's children's demographic, it is certainly still significant enough to seriously factor in when making the homebuying decision.

(The most interesting statistic quoted in that article for me was the large decline in average age of marrying couples, even females, between the 1890s and the 1950s....I would have guessed the opposite.)
Last edited by protagonist on Mon May 09, 2016 4:42 pm, edited 2 times in total.
GoldenFinch
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Re: Buying a house for an adult child (child adult?)

Post by GoldenFinch »

I guess one question I would ask myself if I were making such a decision would be, "What is the worst case scenario result of this plan and can I afford the consequences?"
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dm200
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Re: Buying a house for an adult child (child adult?)

Post by dm200 »

Absolutely. If the banks consider them a bad risk, you should too.
In my opinion, maybe yes and maybe no. That's why I suggested in previous post that the OP themselves try to get the whole story.
You'd have a harder time getting your money back than the bank would.
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Fieldsy1024
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Re: Buying a house for an adult child (child adult?)

Post by Fieldsy1024 »

Why do they have bad credit?

Bad habit of paying bills late?
No CC's?
Skipped payments?

I would never do it. Let them build up their credit as well as saving maybe 25% to put down.
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goingup
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Re: Buying a house for an adult child (child adult?)

Post by goingup »

Perhaps suggest to them how they can improve their credit scores. I don't think it wise to insert yourself into their financial lives or their marriage by becoming their landlord.
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Re: Buying a house for an adult child (child adult?)

Post by celia »

Have them check with other lenders. Maybe they can get a loan for a smaller amount (or a smaller house??) while you give them a second mortgage. You could have them pay you off or you could "gift" part of the amount to them each year. But beware that if the house is sold/foreclosed at some time, the first mortgage holder is paid off before the second. (That's why they are called "first" and "second".)

Note that it is better for them to own it as they can deduct the property taxes and mortgage interest.
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Re: Buying a house for an adult child (child adult?)

Post by rob65 »

JLJL wrote:Are there tax implications for them giving you the down payment for your, presumably, second home? Are there differences in property or income taxes for an investment property that is not or has not been your primary residence, particularly if they (you) sell it? Do you need to file additional forms and does this otherwise add complexity to your tax situation each year? Will the "rent" remain at fair market value, to the extent that it won't be considered tax fraud if the rent would have gone up but they kept paying the "mortgage rate" and you don't claim the difference as a gift?

I'm not trying to patronize, I really don't know the answers. But are you looking for an excuse to say no, other than offending them with the credit thing? The above might help, whether real issues or not.

+1 Consult with a tax advisor. I think there are some significant tax implications of the set-up that you describe.
Last edited by rob65 on Mon May 09, 2016 3:53 pm, edited 1 time in total.
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mundart
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Re: Buying a house for an adult child (child adult?)

Post by mundart »

Thanks everyone for your input. This does seem incredulous to me also. The plan is theirs. Would the down payment from our son for the house purchase be considered as a gift or taxable income to us? I assume the monthly rental they would make to us would definitely be considered as taxable income to us. I agree that even with every possible legal safeguard, it would be nigh impossible to evict them. If a default were threatened, maybe we would move there ourselves and let them rent elsewhere. Not even sure we could get a mortgage as a recently retired couple with no current job. Our retirement assets might be enough to convince a bank to make the loan. I'm the lone voice in the wilderness that wants them to rent until their credit improves. If I don't go along with this, I may end up in the wilderness:-) They don't call the post-WWII generations the "grasshopper" generations for nothing.
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Re: Buying a house for an adult child (child adult?)

Post by NotWhoYouThink »

Maybe if you could tell us how they managed to both save for a large down payment, and have low enough credit scores to make getting a mortgage impossible we could help more.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

mundart wrote:Thanks everyone for your input. This does seem incredulous to me also. The plan is theirs. Would the down payment from our son for the house purchase be considered as a gift or taxable income to us? I assume the monthly rental they would make to us would definitely be considered as taxable income to us. I agree that even with every possible legal safeguard, it would be nigh impossible to evict them. If a default were threatened, maybe we would move there ourselves and let them rent elsewhere. Not even sure we could get a mortgage as a recently retired couple with no current job. Our retirement assets might be enough to convince a bank to make the loan. I'm the lone voice in the wilderness that wants them to rent until their credit improves. If I don't go along with this, I may end up in the wilderness:-) They don't call the post-WWII generations the "grasshopper" generations for nothing.
mundart,

<<If I don't go along with this, I may end up in the wilderness:-) >>

I think you were trying to say that if you go along with this, you may end up in the wilderness. Aka, homeless.

Your instinct is telling you to run away from this.

<< If a default were threatened, maybe we would move there ourselves and let them rent elsewhere. >>

1) How could you move there if you cannot evict them? You will be left homeless and forced to pay the mortgage at the same time.

2) Why would they move when they can stay rent free?

<<Our retirement assets might be enough to convince a bank to make the loan.>>

Which will be used as collateral. Hence, you will be forced to pay the mortgage even if they do not pay the rent to you.

Is your spouse forcing you to say yes?

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sdsailing
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Re: Buying a house for an adult child (child adult?)

Post by sdsailing »

Yes the rental income is taxable. Insurance will be different because it is not your orimary home. You will have depreciation tax advantage which you may not be able to use if you dont otherwise have a need to itemize, but will pay back when the house is sold, aka depreciation recapture.

Computer says 'no'.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

OP,

The story does not add up. If they can save 20% down payment and they have good incomes, why they cannot get a loan and they have bad credit?

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LateStarter1975
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Re: Buying a house for an adult child (child adult?)

Post by LateStarter1975 »

mundart wrote:Thanks everyone for your input. This does seem incredulous to me also. The plan is theirs. Would the down payment from our son for the house purchase be considered as a gift or taxable income to us? I assume the monthly rental they would make to us would definitely be considered as taxable income to us. I agree that even with every possible legal safeguard, it would be nigh impossible to evict them. If a default were threatened, maybe we would move there ourselves and let them rent elsewhere. Not even sure we could get a mortgage as a recently retired couple with no current job. Our retirement assets might be enough to convince a bank to make the loan. I'm the lone voice in the wilderness that wants them to rent until their credit improves. If I don't go along with this, I may end up in the wilderness:-) They don't call the post-WWII generations the "grasshopper" generations for nothing.
I feel for you in this situation. I hope you get to talk some sense into them to see it your way and the way most posters here see it. There is wisdom in the multitude of counsel. Good luck
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Re: Buying a house for an adult child (child adult?)

Post by sdsailing »

KlangFool wrote:OP,

The story does not add up. If they can save 20% down payment and they have good incomes, why they cannot get a loan and they have bad credit?

KlangFool
How are these mutually exclusive? Not paying bills on time or even bankruptcy can be achieved even by the wealthy.
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Doom&Gloom
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Re: Buying a house for an adult child (child adult?)

Post by Doom&Gloom »

mundart wrote:Thanks everyone for your input. This does seem incredulous to me also. The plan is theirs. Would the down payment from our son for the house purchase be considered as a gift or taxable income to us? I assume the monthly rental they would make to us would definitely be considered as taxable income to us. I agree that even with every possible legal safeguard, it would be nigh impossible to evict them. If a default were threatened, maybe we would move there ourselves and let them rent elsewhere. Not even sure we could get a mortgage as a recently retired couple with no current job. Our retirement assets might be enough to convince a bank to make the loan. I'm the lone voice in the wilderness that wants them to rent until their credit improves. If I don't go along with this, I may end up in the wilderness:-) They don't call the post-WWII generations the "grasshopper" generations for nothing.
The bolded is the biggest red flag to me.

I would allow them to learn patience, responsibility, self-sufficiency, and the importance of maintaining a good credit history.

Life can be tough, but they seem to be doing ok with two good jobs and a decent amount of savings. They'll be ok.
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mundart
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Re: Buying a house for an adult child (child adult?)

Post by mundart »

Yes, my wife is pushing this vehemently. The down payment is being extracted from their employee 401K plans. Their credit got whacked when one of them lost their job for a while and bills were not paid for a time. I think their scores are now in the low to mid 500 range. They've been told they do not qualify for an FHA loan. Their prime motivation is to avoid an extra move for the family and to have their housing payments go toward home ownership rather than to a landlord. They looked at rent to own and the terms were fairly rapacious.
GoldenFinch
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Re: Buying a house for an adult child (child adult?)

Post by GoldenFinch »

mundart wrote:The down payment is being extracted from their employee 401K plans.
They are not prepared to buy this home at all. Why not explain why taking money from a 401k is a terrible idea and have them read the Boglehead Wiki so they can start to get on track financially. They need a plan and a little more time.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

mundart wrote:Yes, my wife is pushing this vehemently. The down payment is being extracted from their employee 401K plans. Their credit got whacked when one of them lost their job for a while and bills were not paid for a time. I think their scores are now in the low to mid 500 range. They've been told they do not qualify for an FHA loan. Their prime motivation is to avoid an extra move for the family and to have their housing payments go toward home ownership rather than to a landlord. They looked at rent to own and the terms were fairly rapacious.
mundart,

<<Yes, my wife is pushing this vehemently. >>

Does your wife like to be homeless and live on the street?

<<The down payment is being extracted from their employee 401K plans.>>

Which mean they have little to no savings outside their 401K. So, they are a financial disaster waiting to happen again.

<< Their credit got whacked when one of them lost their job for a while and bills were not paid for a time. >>

Which is consistent with people with no savings and no emergency fund. They are NOT LBYM.

<< Their prime motivation is to avoid an extra move for the family and to have their housing payments go toward home ownership rather than to a landlord. >>

They want to live in a nice "rent control" house subsidized by YOU. Nevermind that they live above their mean and could not save enough money to make this happen. It was not THEIR FAULT that they could not afford a nice house. YOU did not do your part to subsidize their housing.

KlangFool
Last edited by KlangFool on Mon May 09, 2016 4:28 pm, edited 1 time in total.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

sdsailing wrote:
KlangFool wrote:OP,

The story does not add up. If they can save 20% down payment and they have good incomes, why they cannot get a loan and they have bad credit?

KlangFool
How are these mutually exclusive? Not paying bills on time or even bankruptcy can be achieved even by the wealthy.
sdsailing,

That was MY POINT. It has to be something significant that caused the BAD CREDIT. The couple has to spend way above their means to earn the BAD CREDIT.

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Re: Buying a house for an adult child (child adult?)

Post by stoptothink »

KlangFool wrote:
sdsailing wrote:
KlangFool wrote:OP,

The story does not add up. If they can save 20% down payment and they have good incomes, why they cannot get a loan and they have bad credit?

KlangFool
How are these mutually exclusive? Not paying bills on time or even bankruptcy can be achieved even by the wealthy.
sdsailing,

That was MY POINT. It has to be something significant that caused the BAD CREDIT. The couple has to spend way above their means to earn the BAD CREDIT.

KlangFool
I think the original question was answered. They don't really have a downpayment, they would have to do a 401k loan.

I'm with everybody else, OP's son definitely is not in a position to be attempting to buy a home. This is a major risk and also appears to be pretty enabling; this will not help them avoid these situations in the future.
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BL
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Re: Buying a house for an adult child (child adult?)

Post by BL »

Agree that this sounds like a terrible idea. If they had saved up the down payment it still sounded risky, but this is not good at all. They need to save up a down payment and improve their credit rating, and also an emergency fund of several months so they don't find themselves in the same situation as before.

It sounds like it is your wife that needs to be convinced, and that is difficult as we all like to help out our kids, sometimes enabling them is not in the kids' best interest either. When things go wrong, it will damage relationships with the kids.
rob65
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Re: Buying a house for an adult child (child adult?)

Post by rob65 »

mundart wrote:Yes, my wife is pushing this vehemently. The down payment is being extracted from their employee 401K plans. Their credit got whacked when one of them lost their job for a while and bills were not paid for a time. I think their scores are now in the low to mid 500 range. They've been told they do not qualify for an FHA loan. Their prime motivation is to avoid an extra move for the family and to have their housing payments go toward home ownership rather than to a landlord. They looked at rent to own and the terms were fairly rapacious.
I think there might be some hidden tax issues. They might be able to withdraw 401K money to buy a house in their name (not sure about the rules on that), but since the house will be bought in your name, wouldn't the 401K withdrawals be subject to a tax penalty? I might be completely wrong, but I think that's something that you need to check on. Edit: As dm200 notes below, there are probably ways to avoid tax consequences - but they would need to be very careful and make sure they understand the rules and risks of a 401K loan.

Sometimes renting is the best option financially. If they need to use 401K money for the down payment, would they be able to afford a new roof or new ac unit or a major plumbing/electrical repair?
Last edited by rob65 on Mon May 09, 2016 10:29 pm, edited 2 times in total.
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dm200
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Re: Buying a house for an adult child (child adult?)

Post by dm200 »

OK - as more facts and background come to light, it seems both more risky (for you) and less of a good idea.

1. The 20% down that they propose "giving" to you is really advanced/"borrowed" from their 401ks. Their take home net will go down because they will be paying it back. They, apparently, have little or no other savings.

2.
Their credit got whacked when one of them lost their job for a while and bills were not paid for a time.
'for a while' implies a short period, so that means to me that they have ZERO slack in their budgets. Even the slightest 'burp' will cause them to miss obligations. I suspect that their 'rent' to you will be higher per month than they pay now.

3. "Giving" you the 20% from their 401k would need to be handled "carefully. I suspect, though, that if done in certain ways - there would not be tax consequences.

4. YOU and your wife will need to get this mortgage. Can you qualify?

5. Even IF (BIG "IF" in my opinion) this all goes according to this plan, how can they just assume the mortgage? You will have to "sell" them the house and they would need to get a mortgage to get you off the hook financially. There are costs in doing this.

In my opinion, THEY should work with various folks (such as mortgage lenders/brokers, financial planners/counselors, etc.) to get their credit in good shape, save regularly in am emergency fund.
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Re: Buying a house for an adult child (child adult?)

Post by KlangFool »

mundart wrote:Yes, my wife is pushing this vehemently.
mundart,

You should counter-propose to your wife that you buy the house and give the house to them. This is essentially what you will be doing. They will not be paying the mortgage consistently anyhow. And, you cannot evict them. So, essentially, it will be a gift. Depending on their kindness to you and your wife, you may collect some rent sometime. Or, you and your wife will be homeless and stay on the street.

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