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Home Buying & Mixing Family with Money
Ticonderoga
Registered User new member
Registered User new member
I am currently living in an apartment with my longtime girlfriend and we are doing well financially. We've saved up roughly 25k and have not had any trouble meeting our rent demands or other costs. My girlfriends mother, or for ease my mother in law, is in charge of the estate of another family member, and is looking to invest some funds for a return rather than have the money sit around. She has proposed using 100k of her funds as the down payment on a ~250k house, the remainder of which we would be getting the mortgage to cover, wherein we would live for a few years till it was sold for (hopefully) a larger amount and provide a return of investment for her and the building of equity for us. She is dependent on her daughters good credit score and we are dependent on her down payment. Our current rental lease is up in a couple months, after which they have offered a month-to-month rate or an additional year.
Obviously, I have some reservations about mixing family and money, as I've seen it go poorly with my own family in the past. My girlfriend is excited at the prospect of a larger place and the feeling of our monthly payments going towards something rather than down the pit of rental payments. Her mother is anxious to put the funds to use as soon as possible. I'm completely new to the world of home buying so I'm having a lot of difficulty parsing everything. Does their plan make sense, in it's likelihood of return for both parties? We don't need a bigger place, it's more a question of whether we would be missing a good opportunity by passing on this.
Is this the right move for us? Any outside advice would be greatly appreciated.
Obviously, I have some reservations about mixing family and money, as I've seen it go poorly with my own family in the past. My girlfriend is excited at the prospect of a larger place and the feeling of our monthly payments going towards something rather than down the pit of rental payments. Her mother is anxious to put the funds to use as soon as possible. I'm completely new to the world of home buying so I'm having a lot of difficulty parsing everything. Does their plan make sense, in it's likelihood of return for both parties? We don't need a bigger place, it's more a question of whether we would be missing a good opportunity by passing on this.
Is this the right move for us? Any outside advice would be greatly appreciated.
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1) You have not even begun to think about the excruciating taxation and legal implications of that kind of financial arrangement. And it doesn't sound like your mother in law has either.
2) Nobody with 100 grand needs jack shit for credit to get a house. They'll give a house to anyone with that kind of scratch.
3) With your 25k in savings you could easily by a 200k house with no strings attached and have plenty of money leftover.
4) Your mother in law will probably be looking to rake you over the coals for a return when the house sells because she put in 100k, thus obliterating any "equity" you might be thinking of.
5) You'll forfeit all first-time-homebuyer advantages you are entitled to for what amounts to helping someone else out
What you just proposed is making my head spin.
Here's a simpler way to accomplish the same exact thing for her
1) Make your mother and law buy the house 100% on her own
2) Offer to live in it at-cost for an amount reasonably less than what you currently pay in rent
You'll lose out on "equity" but goddamn will it be simpler for the lawyers and the accountants.
DO NOT put your signature on the note for that house. Major mistake.
This is the worst idea.
Home owning isn't a goddamn investment. If she wants a return on her money instead of letting it sit, she can get a financial advisor and have it invested.
As soon as you move in, you're going to get things like "you should rehab the bathroom" then when you bring up costs she'll say "well I payed 100k". Then when you sell, all that sweat equity will go to her as she'll say "well, I payed 100k amount of the 130k we paid off, so I get to keep 75%+ of the profits"
It's not to say it can't work, but it involves houses and money, two things guaranteed to cause strife.
An investment is something you buy then hold on to passively until you can sell it at a profit. A house is something you buy and continuously spend time and money on to improve otherwise its value drops like a rock, then you sell out of necessity (because you're moving somewhere else for work or whatever) at a possible loss (because the housing market is unpredictable and may be down when you happen to need to sell, because the neighbourhood has gone downhill, because all the good services/schools/daycares/whatevers have moved to another part of town, because newer better houses are being built and flooding the market, etc.).
Shogun Streams Vidya
Don't.
Standard first home buying doesn't tend to include your girlfriends mom fronting six fucking figures for the place you want to live. This is an entirely different type of anxiety.
You want to use your equity to get better car loans, or pay off bills, or, make your habitable space better, or, improve furnishings or appliances, or not pay rent when you retire and reduce your livable income.
Buying it to sell at a profit is an idea that needs to die.
I'd remind her of what just happened to the global economy. A lot of people had this same idea back in 2007/2008. I'd encourage her to buy a cheap home on her own with the money she has and plan on renting it out long-term if she wants to make an investment out of it.
go look at an amoritization table http://mortgage-x.com/calculators/amortization.htm
All you'll be paying the first couple years while be interest and taxes.
This is one of the huge things.
When you take into account all the fees you pay to buy and sell, then look at how amortization works, you're still just throwing money down a hole for at least five years when you buy a house with a 30 year mortgage.
Kakodaimonos beat me to the punch. Part of the loan process is that the bank will make you prove where every penny you own came from, and if any of it was a loan or a gift they will give you a hard time.
Also, as a side note from your ML's point of view. She is essentially giving you 100k, and if she is not on that mortgage will have no legal future claim to that money, so that is a terrible investment also.
But this whole plan, this terrifies me.
'She is dependant on her daughter's good credit score' also sends up massive alarm bells.
If you want more money for your house there are other ways of doing it.
401k loans are a good way to go. 2 people 2 401ks to take house loans from that is up to 100k of possible down payment and your only paying interest to yourself.
Especially for someone with apparently more than 100k in the bank.
1. Don't mix family and money when anyone involved has an expectation of getting any of that money back.
2. Unless your mother-in-law gives you this money as a gift, this is an investment property - meaning you (probably) lose all kinds of lovely FHA mortgage options and First Time Homebuyer benefits.
3. Purchasing with another person's money (even a gift) as a down-payment is a PITA, especially if the money isn't seasoned.
4. Legally and tax-wise, this will be a nightmare.
5. Purchasing a home with the expectation they will appreciate is an incredibly risky investment strategy.
5b. Costs related to purchasing and selling a property (mortgage fees and other closing costs, realtor fees, etc) will eat up a significant portion of any anticipated profit.
5c. Most 'investment' homes aren't going to appreciate much without large amounts of sweat equity / improvement - which, as has been pointed out, can be contentious.
6. People with six figures to put down don't have trouble getting mortgages.
6b. Never, ever co-sign for someone with six figures to put down and bad enough credit they need a mortgage.
7. People with $25k in savings and decent credit don't have trouble getting mortgages.
8. Do you really want your MIL to be part-owner of your home, with everything that could potentially entail - such as thinking she can come / go as she pleases, tell you what to fix / do, etc?
There are lots of options for what your MIL could do, but it sounds like what she NEEDS to do is go talk to a financial adviser for assistance in investing this money. She probably just wants to use her position as being in charge of the estate to help you out, but that's potentially a violation of her fiduciary duty as trustee and it doesn't sound like you need that much help.
There are options for you as well. Outside of a small number of markets, you should be able to find / buy a quite nice home with the $25k you have saved up, potentially a $200,000+ house - with your own mortgage, and with no expectations beyond it being your own home. It'll be your own equity, and you'll get all the lovely home-owner FHA and tax benefits yourself.
if she really wants to invest that money in real estate, she needs to find a good trustworthy General Contractor, find an undervalued house (possibly a foreclosure/short sale), fix it up, sell it, and hope for the best. She should be prepared to lose money/not make much, and potentially have that money tied up for a while if it doesn't sell quickly.
This is the only reason I would say no personally.
Saying that, there is nothing wrong with taking money from "family" but firstly you need to sit down and discuss what this means. How long does she intend on investing the money would be the big one. Is "rent" to be paid (ie. a small percentage of what you would be paying to the loan to her).
Find out these answers.
If you are happy with these answers.
Then sit down and sign a contract with her which states these things. State it is nothing personal, but you want to cover all eventualities. Make sure you also cover the two of you splitting up.
100k will chew up a huge amount of your principle and if you pay off your loan as if you had a 225k loan instead of a a 125k it would easily offset any first home buyer advantages.
Satans..... hints.....
MIL cannot gift her daughter $100K without significant tax penalty (eating into expected gain on the investment), so she will be a co-borrower on the note. This will make things complicated on the sale side unless you guys hammer that situation out in writing.
Use this as an opportunity to explore other investment options or the possibility of buying a house on your own. That said, you obviously seem pretty close to your girlfriend, but buying a house together is a big, binding, like for real you are going to be here for awhile, thing.
Just don't let anyone convince you that the plan in the OP is a good idea, no matter how excited and well meaning they may be.