Sub2 Mortgage but Parents Stay in House

5 Replies

Quick scenario: parents have about 20k left on their mortgage, paying over the next 5 years. Low income, barely break even cash flow. The house is in dire need of repairs. They don't really want to move, and we'd like to keep this house in the family.

Can I buy their house for the exact remaining balance of the mortgage using a "subject to" sale AND they remain in the property? I live out of state, I would not reside in this house as a primary residence, and would not be charging them rent. My goal is to free up their cash flow each month that they could put towards repairs.

My first concern is: is this legal? My parents get to stay in a house while I pay their mortgage, I get the deed and an asset for 20% of the market value - "arms length" red flags come to mind here. Are we crossing a line here with the fact that they'll still be occupying the property? Since I'm not applying for any sort of traditional mortgage, investment or otherwise, do any of the qualifications (credit score, debt/income ratio, it not being my primary residence) come into play here?

To me, there has to be a catch. I'm basically getting a $100k house for $20k? What are the tax implications for me or my parents?

I'm aware of the risk of the bank calling the loan.

@John Smith No problem at all. You're basically describing what's called a Sale-Leaseback (if you want to do more research on it) except you're not going to charge your parents any rent.

There shouldn't be any tax implications for your parents since they're not making anything on the sale. Presumably you will have to pay capital gains if you ever sell it.

With that much equity you also won't have a problem if the bank ever decides to call the loan. If you have a job you should easily be able to refinance, or get a HELOC on your primary residence and pay it off.

Credit and DTI have nothing do to with sub2's. That's the whole point, the loan stays in your parent's names.

Can you just pay off their $20k mtg when the transfer the deed to you....cleaner that way with no due on sale issues.  As for the due on sale, if it does get called, you can simply transfer title back to them if you couldn’t refi.....no harm no foul.

@Doug Pretorius this is great to hear. I was actually talking to someone and they brought up a sale-leaseback as well, but I'm a little confused: for a leaseback don't I technically have to "buy" the house and therefore apply for a mortgage myself? Or how do I get the financing in that scenario?

Are sub2 and sale-leaseback completely separate processes (as in, I need to pick one or the other)?

If so, I'm leaning towards sub2 to get the deed under my name and take over the payments, because unless I'm missing something, that just seems way easier than involving a bank/lender.

And honestly, if the biggest risk is the lender calling the loan if they don't like the fact that the deed transferred, like @Wayne Brooks mentioned, I can just transfer the deed back?

Also - who do we reach out to to start either one of these processes? Is it all solely documentation drawn up by a real estate lawyer and we're good? No agent, lenders, etc.?

At the end of the day, will definitely be discussing with a real estate lawyer, but this is really helpful. Thanks again!

@John Smith No you don't need to get a mortgage yourself. Sub2 is when the title is transferred while leaving the mortgage in place as-is. So you are buying the house, but the mortgage will stay in your parents name. A sale-leaseback can be done as a sub2 without issue.

All you need to move forward is a real estate lawyer or title company who understands that you're transferring the deed without paying off the mortgage. With that one exception it is handled exactly the same way as any conventional sale. Then all you have to do is start paying your parents mortgage for them.

I do Sub2's all of the time (3 last week alone), there is no problem with you doing this, however, make sure that you have a creative real estate attorney that knows what this is, not just a real estate attorney. Your not really doing a lease-back since you're not charging them anything. You could if you charged them $125 month rent and then took the loss monthly as a write-off (check with your accountant or tax attorney).