A Question on Legalities and Blocks

I am trying to attempt to purchase a home via the following method: First of all, let me say that the level of trust is EXTREMELY high on both sides. My cousin is looking to sell a house that she owns outright (no mortgage). I would like to buy this house. My wife and I, due to failed marriages in the past, have bad credit and very little cash we could put down. What I proposed, and my cousin okayed, is that she would sign the deed over to us. Using the house as collateral, we would obtain a home equity loan for the value of the house. We would pay her the cash for the house, move in and pay the equity loan as our mortgage. Of course, there would be a signed agreement between us that, if for any reason we could NOT obtain the loan, the house would return to her as owner. Can anyone see stumbling blocks in this plan? Please advise. I live in the Bronx, NY. Thank you.

[HomeGuru]

Yes.

What types of things?

[HomeGuru]

There are numerous problems ranging from title ownership to financing. For example let's say the first step was completed and cousin deeds the property to you and your wife. Before you even attempt to get financing, I would ask the following questions. What would happen if one of you were to die, both get hit by a truck and die or get divorced? What happens to the property as far as ownership? How would your cousin get the property back?
How would the tax issue of your cousin be handled? Is she making any money on the sale that would trigger a capital gains tax, would she be required to pay a gift tax? What would be the actual sales price of the property and the tax basis for Federal and State tax purposes?
Next, the lender would do a title report and would ask how much did you buy the property for? What would be your answer? What is the value of the property? How are you going to pay your cousin for the value of the property, when there is no way that a lender is going to give you 100% financing on a home improvement loan with your credit history? What if a lender does agree to finance but only on a 50% loan to value basis with 2 points and an interest rate of 11.5%. Can you pay loan aplication fee, credit check, real estate appraisal cost, closing costs, escrow and documentation fee etc. and can you pay the monthly mortgage P & I payment including in addition the real property taxes and insurance? And how would cousin get paid the other 50% of the purchase price?

I have a bunch more questions but these will get you stuck for this year.

[Edited by HomeGuru on 11-24-2000 at 05:05 PM]

If your credit is bad, why do you think you'd be able to get a home equity loan for 100% of the properties value if you don't think you can obtain a regular mortgage.

Another suggestion: If your cousin is not in need of all of the proceeds from the sale immediately, you could essentially purchase 80% of the value.

Here's how it would work. Let's say value is $100,000.00. You would sign purchase agreement with cousin for $100,000.00. In purchase contract there would be a stipulation that seller is gifting to buyer 20% of value of home. You would obtain financing in the amount of $80,000 (20%) At closing rather than seller receiving the 20% in proceeds it is gifted to you for your down payment. You then own the home with a loan at 80% of the purchase price.
Since you are financing only 80% of the purchase price you are more likely to be able to obtain affordable financing. You may pay a higer rate than one with good credit but then again you would have in the scenario you proposed anyway.

You will have to work out some agreement with cousin as to repayment on the 20% that was gifted whether it is a seller carry back or whether you try and obtain a 20% homeequity loan after closing. You may end up having to waite for a while to essentially perform on the 1st mortgage and demonstrate your ability to make good on the loan (depending on your credit) in order to obtain a home equity loan.

If cousin trusts you perhaps he'd give you the time in order to pay him/her back fully.

If this is an option, find a lender and get pre-approved first for this exact scenario except with actual purchase price or make sure you make the purchase agreement contingent upon financing.