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Questions about mortgage, parents, children with bad credit.

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rabidfox
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Questions about mortgage, parents, children with bad credit.  Reply with quote  

I have found what can only be described as a cheap but well-maintained home in a good neighborhood. The asking price is $45,000. Even for the midwest, this is a very good price.

I have been wanting to own a home for the last year. I've been saving, and have about $3000 tucked aside. Not much, but it's something.

I have bad credit. I have a bankruptcy from 9 years, six months ago. It falls off my report in June. I have student loan debt, but no credit card debt (which is a bad thing, since I don't have anything current to show my credit worthiness). I've had two car loans since then, but no current car loans. My credit score shows mid 500s.

I'm paying $600 per month for rent. A $45,000 home may well come with a payment comparable or even cheaper then this craptastic apartment.

I don't have the ability to get a loan. I was working on getting my credit in order, I was going to get a secured credit card and a shared secured loan from my credit union. But I really like this house, all the others in it's price range have been undesirable.

My father has AAA credit and a lot of income. If he were willing to get a home loan for me, what sort of pitfalls might we face? I mean technical ones. I'm aware of all non-technical issues.
Post Sun Sep 30, 2012 1:16 am
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Wino
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Well, I'm now going to be "your dad" and approach your plan from that direction.

First off. I am NOT going to cosign on your loan. Don't even think about it. I did not get AAA credit by making decisions like that.

Secondly, I'll assume he has income to cover this new house on his own. In that case, what I would do, as your dad, is to purchase the house IN MY NAME, and let you RENT it from me for the equivalent of my payments, plus my taxes, plus insurance, plus flood insurance, plus 10% for normal maintenance items.

This leaves you with having, in addition to the above, renter's insurance, AND the fact that I'm going to have you sign a lease which says you'll pay for major repairs above the 10% I'm charging you. Also, the lease will state you'll put $2250 per year into the house in upgrades and improvements (5% of the price) every year for 5 years, and that these improvements will be at your expense with no way to recoup the expense were you to move out. Even "well-maintained" houses need to be improved to keep their value.

I would also have a clause that says if you are ever 2 months behind on the rent that you move out immediately and I get to sell the house. Lastly, I would have a clause that you can buy the house from me for $45,000 for up to 10 years after this agreement is in effect, and if you have not defaulted on it. No. You would NOT get your rent back.

The above plan protects your father, a little. Personally, I would do this for one of my kids, but that's as far as I would go.

Your house sounds like a good investment, to me. What State are you talking about where you can get a house at that amount?

Your best plan would be to get your credit in order, save up more money, and buy a house like this yourself. You found this one. If you keep looking, I'm sure you'll find another that is similar to this when you can afford it and have your credit back in order.
Post Sun Sep 30, 2012 1:47 am
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rabidfox
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Wino: Thank you for this elegant, well-worded reply. What you're describing would be a win-win for both my father and myself. I win because I get a home to call my own, improve, and invest in. I also win because, in the scenario, even with all the extra money attached, the money I'm paying is going back into the family, and it's still quite possibly cheaper for me overall, since even when I do qualify for a loan it will be at a higher interest rate. My father wins because he can profit off of this deal.

Two things I wonder about: First, would Dad have to consider this as taxable income from a renter? I assume he would. Second, are there any issues with him buying a home which he will not physically occupy?

As for your question, the house is in Kansas. It's 1,100 Sq Ft of home, has a detached garage, 2 bed, 2 bath. I really planned on waiting on a home until I could establish my credit, and if I have to wait, I will, but this home appears to be a good deal.

Thanks again for your reply!

quote:
Originally posted by Wino
Well, I'm now going to be "your dad" and approach your plan from that direction.

First off. I am NOT going to cosign on your loan. Don't even think about it. I did not get AAA credit by making decisions like that.

Secondly, I'll assume he has income to cover this new house on his own. In that case, what I would do, as your dad, is to purchase the house IN MY NAME, and let you RENT it from me for the equivalent of my payments, plus my taxes, plus insurance, plus flood insurance, plus 10% for normal maintenance items.

This leaves you with having, in addition to the above, renter's insurance, AND the fact that I'm going to have you sign a lease which says you'll pay for major repairs above the 10% I'm charging you. Also, the lease will state you'll put $2250 per year into the house in upgrades and improvements (5% of the price) every year for 5 years, and that these improvements will be at your expense with no way to recoup the expense were you to move out. Even "well-maintained" houses need to be improved to keep their value.

I would also have a clause that says if you are ever 2 months behind on the rent that you move out immediately and I get to sell the house. Lastly, I would have a clause that you can buy the house from me for $45,000 for up to 10 years after this agreement is in effect, and if you have not defaulted on it. No. You would NOT get your rent back.

The above plan protects your father, a little. Personally, I would do this for one of my kids, but that's as far as I would go.

Your house sounds like a good investment, to me. What State are you talking about where you can get a house at that amount?

Your best plan would be to get your credit in order, save up more money, and buy a house like this yourself. You found this one. If you keep looking, I'm sure you'll find another that is similar to this when you can afford it and have your credit back in order.
Post Sun Sep 30, 2012 2:18 am
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Wino
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It is only income if he brings in more than he pays out. Appreciation of the house's value does not count. My brother lives in Kansas. Are you he? Smile

All kidding aside, the deal I set up is a good one, and should be break-even for your dad, more or less. The only thing you're paying above the amount he is paying is the improvements, and those are not cash in his pocket. You are effectively volunteering to make these at your own risk and expense.

Lastly, any improvements become yours when/if you buy the place. I really did think of how I would work this with my own kids, and I'm very generous with them.

The only real issue is that your dad will probably buy the place outright, and then charge your rent based on a spreadsheet for the phantom amortization of the non-loan. In other words, he'd have to work out what he WOULD be paying for the payment if he were to have financed it.

If my son or daughter brought the deal to me, as I set up, I'd do it for him.
Post Sun Sep 30, 2012 2:59 am
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rabidfox
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Although I have two brothers, you only write like one of them (and he's still in High School). So I think we can safely decide we are unrelated.

I don't think my dad would buy the place outright: he has great credit, but I don't think he has much on-hand cash. I've borrowed and repaid two thousand dollars from him over the course of my adult life (twice), but 45k doesn't seem to be the sort of thing he could pay for in cash.

I think the best I can do is just ask. If they can't or won't do it, then I just keep my eye on my credit score and work to improve it. I really do like your plan though, and hopefully he'll like it too.
Post Sun Sep 30, 2012 3:33 am
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littleroc02us
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IMO your not ready to buy a house yet. Student loan debt needs to be taken care of to free up cash in case of emergencies. Houses are very expensive, the face value of the house is only where it begins. There's property taxes that go up every year, insurance, curtains, upkeep, you need tools, a lawn mower, you get the picture. There's a home on every block so another will come along when your in a better financial position to buy. Good luck and pay off your debts...

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Sun Sep 30, 2012 4:27 pm
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coaster
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I'm for waiting as well; it just doesn't sound like the timing is quite right.

~Tim~
Post Mon Oct 01, 2012 3:50 am
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