Parent Helping Kids with Mortgage Question

[Loren Ver]

I was asked a mortgage question, but mortgages aren't my expertise so I thought I'd pass it along to see if I was missing anything.

The kids currently have a house with a mortgage that has a rate in the 4% range with a pretty high (to them) monthly payment.  They have income issues (job losses two years ago), bad credit, and other high interest debt.  The current mortgage is two years down off 30 years.  They have been in the house a while (8years-ish) but had to redo the mortgage two years ago due to some issues (I don't have many details on this, but timely repayment was part of it). 

The father has made an offer to refinance the house using his credit (good) and his status as a veteran (a VA loan).  This should drop the monthly payment, giving them some room to pay down their high interest debts and work on their credit etc.  He lives in town, but not with them.

Details I have:
- They will have a contract, the father has done this with other kids and has a contract he uses.  I haven't seen it.  Apparently non-payments are covered.
-  Mortgage payments will be made straight to the company, not the father
- Father will hold the Mortgage, Kids will hold the house title
- The plan is to re-evaluate in one year to see how things are going and what the plan is moving forward. 

My knee jerk reaction is not to mix family like this. I voiced that concern, but this is apparently not any of their concern so that isn't want I want to address here. 

My question to you is, what are the concerns (if any) associated with having this done?  Is splitting who holds the title and the mortgage okay?  I know their mortgage payments wont help the kids credit if the mortgage is under the father's name. 

I'm hoping this all goes super well, and it is exactly what they need to really start digging their way out of the debt hole they are in.  I just want to make sure eyes are open.

[Sibley]

I don't know why the father would do this! He's got all the risk (the mortgage) without the house title. It's a great deal for the kid though. If things go south (kids don't pay), then yeah, could really mess up family relationships.

And the kids really should get their act together and pay their bills on time.

[Catbert]

He's also probably going to have to lie.  AFAIK the VA just gives principle residence loans not "investment loans" or whatever the heck this is.  Even if he was able to get an "investment" loan it would still need to be secured by the property so he can't give the house away.  He would have to claim he was buying the house as his principle residence.

Even absent these problems, its one of those things that works ok right up until it doesn't.  People with bad credit and high consumer debt who've done cash out re-fi previously and can't get a decent mortgage rate now are bad bets to tie your credit rating do.  What's your friend going to do when they don't make a mortgage payment?  Nothing he can do except pay the mortgage himself or trash his credit and let the bank evict them.

[yachi]

"- Father will hold the Mortgage, Kids will hold the house title"
This part won't work.  At least one borrower must be on the title deed to qualify for a mortgage loan. However, most mortgage lenders prefer that all borrowers appear on the title.
VA loans also have occupancy requirements:
https://www.veteransunited.com/valoans/occupancy-requirements-for-va-loans/


Here are some risks/concerns:
1. Children are habitually late paying the mortgage, and it reduces Dad's good credit.
2. Children stop paying property taxes, and the property is foreclosed on tax sale.
3. One year comes up, and refinancing rates are significantly higher than the 4% of the kid's previous loan, restricting the Dad's ability to get out. (not unrealistic since 1 year is not very long to rebuild kids credit)
4. Dad wants to buy a summer home, but cannot because the outstanding mortgage debt it too high for his income.
5. Kids standard of living increases by the amount of the monthly savings, so that even though the mortgage payment is not as high, other monthly payments have filled the gap, and kids fail to pay down their high interest debts.
6. Kids stop taking care of the house to the point where it requires so many repairs, it makes financial sense to offer up a deed in lieu of payment on the mortgage - makes financial sense for the kids, but not the dad.
7. Dad's health declines, and, because he holds the mortgage on the house, feels entitled to occupy the house and sell his own house.

The better solution would be a loan from Dad to pay off the high interest debt, with the loan recorded as a lien on the house.  I suspect this isn't workable due to Dad not having the cash the fund the loan.  It would be cheaper for Dad to gift kids the difference between the current mortgage payment and the new mortgage payment, than for him to be on the hook for the entirety of the new mortgage payment.

[ChickenStash]

I'm curious about why/how this situation comes up often enough that the father has a contract ready to go.

[Aegishjalmur]

Beyond the horrible issues of mixing family and finances like this.....

VA is only for primary residence and one of the documents father will be required to sign is a statement of occupancy, stating he will occupy as his primary residence within 60 days of closing. So that means that father is going to have to commit loan fraud (lie) to get it... which means if anyone reported him to VA, loan would(likely) become due in full (and last I knew, VA offered a $$ payment to people who report loan fraud in cases like this). I suspect if he has done this before, it was as a conventional investment loan, not as a VA.


VA will also not do title in just someone else's name.... They could be on there as well, but dad would also be on title.

[partgypsy]

Aside from a)that how it is presented the father can't get that kind of loan unless lies that lives there, and
B) all the problems already listed (see yachi). It's an unenforceable contract! The only motivation left (aversiveness of debt, threat of loss of home) are being removed. Paradoxically while the Dad wants to help, it may make things worse. And if they do stop paying, what happens then? Not only will it damage the father son relationship, there seems to be no provision to unwinding it. What if the Dad dies, or the son? To be brutally honest, if they can't afford a mortgage with 4% interest, they can't afford the house. Sometimes "free" help is actually really expensive.

[mathlete]

The only reason I would even think about something like this is if I knew something about the borrowers that lenders didn't know. i.e., they're not as bad of a credit risk as the numbers would suggest. Then the whole situation basically boils down to saving money through arbitrage.

If the borrowers are as bad of a credit risk as the numbers indicate, then I would just suggest giving them money.

[partgypsy]

From what I can tell, very doubtful the dad could get a mortgage as described in this post. He could get a investment mortgage or loan. And he would also need to be put on title. Also makes more sense the son to be on mortgage as well. After all that is done, Dad needs to be comfortable if/when they stop paying to: pay the entire mortgage. Have terrible credit, unable to get car loan, 2nd home, etc. Or kick out kids in law and sell house. Is the Dad ok with those options?

[Loren Ver]

Thank you all for your replies!  I really do appreciate it.  Things were setting off my alarm bells and I need some keen minds to get them into focus for me other than the this just doesn't sound right.  I talked to DH about it and he said it sounded scammy :).  Hard to have a deep meaningful chat with people that aren't your family when all you have is the feeling of wrong and scammy. 

Since you were so nice, here are some extra details that will address some of the questions posed up thread:
I've been working monthly with the kids for a few months to help get their expenses more in line with their income. The kids have been paying down debt, but the process is slow.  Job loss due to health threw them for a loop.  They have been working on getting disability, but that might not happen.  It is in appeals (or what ever it is called), so maybe, but I told them to work with what they know they have. 

I don't know the father (met him briefly once).  He helps them with cash when he can (car repair that came up, etc), but I don't think he has a lot of liquid floating about.  My guess is he is trying to leverage what he does have (status, good credit) the best he can to help them out.  From what I have been told he is planning to put some funds towards some of their debts that we are working on chipping away.  If he does, I have told them where to best direct the funds so they are all pulling the same direction. 

The father has other kids and apparently has done other things with them (tried to start businesses, done the mortgage thing or something similar).  I assume it has worked out, or he wouldn't keep doing it, but I could be wrong there.  Based on how his kid talks about him and how his kid talks about money, we think about finances very differently. 

[Sibley]

Based on what you've shared, its much more likely that the father's financial house is in disarray. Just because you're not aware that it's on fire doesn't mean all is well.

[use2betrix]

Sounds like the father isn’t in the best financial position and needs to focus on his own needs if he plans to retire some day.

Also sounds like he has a history of bailing out his kids, yet their positions don’t seem to be improving.

Maybe they should downsize into something they can afford or rent something small while they get their finances in order.

[10SNE1]

It is a really bad idea for the father to get involved. Proceeding with what is proposed will only make the existing mess worse.

[Loren Ver]

Based on what you've shared, its much more likely that the father's financial house is in disarray. Just because you're not aware that it's on fire doesn't mean all is well.

Oh most likely, I just like to give people I don't know the benefit of a doubt, at least until I know better.  I also like to tread extra lightly when I am talking to others about their family members, putting people on the defensive isn't going to help anyone in this situation either.

[Weisass]

Based on what you've shared, its much more likely that the father's financial house is in disarray. Just because you're not aware that it's on fire doesn't mean all is well.

Oh most likely, I just like to give people I don't know the benefit of a doubt, at least until I know better.  I also like to tread extra lightly when I am talking to others about their family members, putting people on the defensive isn't going to help anyone in this situation either.

That is a really smart and compassionate strategy when dealing with family dynamics. Best of luck to you. This sounds complicated (but what family issue isn’t, at least a little?)

[ducky19]

If the father has good credit, he should consider adding the kids to his credit cards as authorized users. This will help the kids' credit score, reduce his risk, and allow them to refinance at a much more favorable rate.

The car we bought my daughter when she turned 16 finally gave up, and she bought a new to her car on credit (she's an adult at this point, I think she was 20 or 21). I didn't know until about a year later what her interest rate was, a whopping 16%! I added her as an authorized user on a few of my accounts, which showed up as $50k of available credit with a stellar payment history on her credit report. The card came to my house, which I promptly shredded, so there was no risk of her using it to spend (any requests for a new card come to the cardholder's address). She refinanced the car and got a much better rate - I think it was around 5% (not bad on used). She is still on my cards to this day and has kept her nose clean credit-wise, and today she closes on her first home with a 2.5% rate for 30 years!

This would be a much better option than the father putting the mortgage in his name - as others have stated, everything will be fine until it isn't.

[clarkfan1979]

I bought a house-hack as a grad student with my own money. My step-dad co-signed on the loan because I didn't have enough income to qualify for a loan. My plan was to get 3 roommates to pay the mortgage and it worked.

I could have actually done a "no-doc" loan in 2007, but I wanted the lower interest rate that came with a traditional loan. I had proven myself to be responsible with money, so my step-dad didn't hesitate to co-sign for me. If he didn't co-sign, I would have done the "no-doc" loan.

I think I am the exception and not the rule. Most people that need a co-signer made some bad decisions and need help getting out of the hole. I would let them dig themselves out of their own hole before helping them.