Father willing to buy out my mortgage and I pay him. Worth doing? Pros and cons?

13 Replies

So the scenario I have is that I am currently in the process of refinancing.  Thinking about it, I posited the question to my dad if he were to "pay/buy it off", and I were to pay him instead of the bank, he would benefit from the interest payments and nothing (ideally) would change on my end.  So I guess my questions would be...

-Is this do-able? (money isn't the issue)

-Would I still be able to maintain a credit history/record by paying him? Or would this mess with it as a result?

-Can I still deduct during tax time?

-Is there any legal situations that need to happen to make this work?

-Is there any pitfalls or problems I would run into?

Thanks!

@Zachary Martin I think its a great idea. Keeps your interest in the family. Your credit will have pros and cons. It will show the payoff without refi, but unless your dad goes to a local agency to report the credit, you won't get the benefit of on time payments. Your debt to income will greatly improve though. Yes you can still take the interest deduction. There really aren't any legal issues with an installment sale agreement. 

bad mistake. The borrower is a slave to the lender. Better the bank than your Dad. 

@Tiger M. Took (most) of the words right out of my mouth. Though debt-to-income will remain the same as you are still generally legally required to report ALL debts when obtaining financing, regardless of who the debtee is. 

@Zachary Martin There are several pitfalls you will need to avoid - the biggest one off the top of my head will be avoiding the mortgage buy-out being classified as a gift. Depending on the size of the mortgage, such a classification will negatively impact your father. However, families loan each other money all the time and a solid loan agreement will clear that up. Speak to a RE Attorney and also a CPA. Without knowing all the details of your and your father's financial situations, it's difficult to offer up any actionable advice. 

@Arlan Potter (tag isn't working) - that's not necessarily true. As Tiger correctly stated, it keeps the money within the family and can be very beneficial. It's done all the time. However, the family needs to fully understand what they are getting themselves into so as to avoid awkward holidays. 

All you need is a note and a mortgage drafted. Any real estate attorney can do this for a small fee which will be much less than a traditional loans closing fees.

I've borrowed money from family, it depends who they are and their situation and ur relationship with them, if u can lend from Dad instead of bank knowing relationship is stable then it's a good option.
Sometimes lending fri family can be hard coz being a slave to the lender can turn things around therefore harming the relationship.
If it's working for both of use and is win win then great I think.
I have been in trouble before and not able to pay back for some time but it never harmed relationship coz my family didn't ever hold anything against me. U do feel bad if ur around then and I have to buy something and u owe them money tho...
I guess u have to weigh up the. Cost for worst case scenario

@Tiger M.  My Dad said he wouldn't have any problems reporting whatever needs to be reported.  So that wasn't an issue.  He also agrees that its good that it stays "in the family".

@Arlan Potter  My dad is very generous to me and I trust him completely.  I highly doubt any issues would arise.

@Brandon Hall  The purchase wouldn't be a gift or at least intended to be one.  My current loan is for about $164k.  How would it negatively impact my dad?  As far as our financial situation.  I have a stable job with a steady income and pay my payment weekly (1/4 every week). My dad is quasi-retired, he does some contract work, but has a large amount of cash sitting around.  He was a CPA and a controller so he seems to think that this scenario is fine.  The maintaining a "credit history" so that I wont be hindered in the future if I were to get a new loan is a concern.  Also being able to use my loan for a deduction would also be the part of this that would make this a "overall net family benefit".  I would still be making payments and later deduct them, building credit.  He would be taking the payments and getting the income of my payments and paying taxes on that and ending up "making money".  I want this to be a benefit to BOTH him and myself.  Or at least not hurt either him or myself.

Also, thanks to everyone who has responded!

@Zachary Martin

Oh sorry I just re-read ur post, yeah ur right ur not borrowing he is acting as a bank/lender so in that case bless him and win for u both!

@Zachary Martin I hope I didn't unintentionally strike a nerve. When I said something like this could negatively impact your father, I was referencing the loan being classified as a gift. If such a thing happened, your father would have to file a gift tax return with the IRS and would ultimately see his lifetime exclusion shrink, which would negatively impact you in the future.

Unless you have a documented loan in place secured by the property, and a payment history has been established, you may find yourself fighting a losing battle with the IRS.

Also, can you expand on your deduction comments? Are you not deducting the loan payments currently?

We purchased a home using my Father-in- law as the “bank”. We paid him interest(1% bless him). We still had the warranty deed in our name form the title company. We used the aromatization schedule to figure up our interest for our taxes every year.  It worked really well.  Nothing was reported on our credit but we weren't worried about that.

Also and I hope you don’t have to deal with the following.  When he passed away the remainder of the mortgage was considered part of the estate to be divided equally between my husband and his brother. We simply bought him out of his half with the other inheritance. There was no legal paperwork to specify what would happen to the property if he pass, and I could see how depending on your family situation it would be good to see a lawyer to be clear about what happened to the property should he pass.  If I could do it over we probably would.  it was a non issue but it would be nice to have something shoud you need it.

This is just some food for thought

@Brandon Hall No nerve was struck at all.  I'm deducting loan payments, I just wanted to make sure I could still do it if he had the property without being an "official financial institution".  I figured that some banking lobby would have had a law stating something to that effect a long time ago.

What I am looking to do is what @Andrea S. (tag didnt work) is doing.
I am his only heir and currently has everything in a trust, and would put my property in it also so if he were to pass, then it would go to me.  

Basically I would want to keep everything the same but my father would be the bank.

I would continue to make the same payments just to him instead of a bank.  He would get the income of the interest and claim it as income.  I would still have an escrow for taxes and insurance.  I would still have a credit history.  I would still deduct it on my taxes.  He would have to file some paperwork I assume to make do this.  

It just seemed like a good way to benefit one person (my dad in this scenario) while there would be no change for myself.  It seems a bit like "gaming" the system a little which is why I was slightly skeptical that it would be legal to do.

Thanks everyone for commenting on this.  I think I'll pursue this!

You absolutely can do this, but make sure to use a competent real estate lawyer in your jurisdiction. Dodd-Frank act may apply, as well as your state version of SAFE. It's not as simple as a note and a deed anymore.

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