I’m looking to buy a house, and the market near me is hyper competitive. My parents offered to loan me the full cost of a house so that I can make a cash offer, then I would have 5 years to pay them back by obtaining more conventional financing. I’m struggling to figure out how to structure the arrangement. Ideally, I would pay then the same amount I’d be paying on a regular mortgage for five years, then take out a mortgage or “refinance” to pay the remaining balance.
If they just gave me the cash, that would likely be a huge taxable gift. If they structure it as a loan, that makes sense but I’m not sure if I can “refinance” out of a loan from my parents.
Anyone have thoughts on how to make it work?
Gift is taxable for the giver, and only after hitting the lifetime gift limit (~25 million for your parents combined). There will be no taxes.
The loan between you and parents will not show up on your credit report, so nobody else will know it exists. If they give you $200K and you buy a house for $200K, then you own the house free and clear and you owe your parents $200K. In the next 5 years, you find a lender to cash-out refinance the house, which gives you a mortgage. The max LTV on conventional mortgage is 80% I believe, so you get a wire transfer for about $160K (minus closing costs and fees) once the refi goes through. This amount could change if the value of the house changes before you refi, but let’s assume things stay the same. Now you give that almost $160K cash to your parents. At this point you have a mortgage for $160K and you still owe your parents $40K.
The only questions are whether your parents want to be paid interest, and whether you can qualify for the $160K mortgage.
There’s another way to do this. The cash offer doesn’t actually mean you have to pay cash, you can obtain financing. You can waive the financing contingency in your purchase offer, which makes it look like a cash offer. You can still obtain financing though. If it goes through on time, then you don’t need your parents’ money.
Maybe the house could be owned by an LLC and you could plan the succession of the LLC from your parents to you with the new financing? You would want a lawyer for that.
You could go to a few mortgage companies and get pre-qualified for a mortgage. They would look at all your credit and income to decide how much of a house you can buy. You could also talk to them about how it would work for them to refinance, but that should t be a problem as long as you qualify for the loan.
I’d try to make sure you found a mortgage contract online on legal zoom or something. Also make sure your name is on the deed, I’m sure your parents are great but I’ve heard some horror stories where pops and son had a falling out and the parents end up telling the kid to get out without reaping the rewards.
Likely won’t happen to you, but cya
A cash offer on a house is typically useless if you think you will get the home cheaper from the seller because it’s a “ cash deal “,. The seller is going to get their money either way. People often mistake taking “ cash “ to a car dealership will get them a hell of a deal on a brand new car in the showroom but it won’t. This is a misconception.
Cash only matters in this instance if you want to save on interest repayments.
The only way this cash deal can work in your favor is that your parents charge you zero interest.
But would you realistically be able to repay your parents an average of $3,400 a month for the next sixty months? Always remember, borrowing or loaning money within a family can destroy healthy relationships.
I question this as well! My dad offered to loan us the cash to buy our next house before we get an offer on our current but wasn’t sure the legality behind giving back say 350k when we refinance
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