Expert: Diann Tonnesen - 7/25/2007

Question
My mom's health is poor and my husband and I want to buy her home, build an addition for her to live in, and remodel the existing home. She owes $55,000 on her mortgage, the tax value (as of April 2007) is $148,000. What is the best way to borrow  money to do these things? Our #1 priority is building a separate apartment for her. We've contacted local officials about permits, etc and all is a go. We just need to borrow the money. Also, this will be our first home purchase.

Thank you!"

Answer
Hi Darla,

Do you have any idea of the cost of the addition and the remodel yet? If you buy your mom's home from her at the current market value (which may or may not be higher than the tax value), and qualify for a loan for most of the sales price, you could use the balance of the money that your mom receives to do the needed improvements. (For example: sales price $148k minus $55k loan balance would equal $83k to use for improvements.)

It should be stated specifically in the sales contract that this is what the money will be used for. Even though this is your mom, all major agreements like this should always be in writing! Should she unexpectedly pass away before the work is completed, that money could go into her estate and be subject to inheritance taxes and/or claims by other heirs.


Another option, if you can get written estimates from contractors as to the cost of improvements and an appraisal stating the future value of the home WITH the improvements, it may be possible to get a loan for more than the current value as well. As you need the money for materials and labor it will be issued from a construction account set up specifically for that purpose.

A third avenue would be to have your mom take out a home equity line, do the improvements and then buy the home from her for a previously agreed upon price. All three of these scenarios could work.

Much of this will definitely hinge on how much you can qualify for. The best advice would be to go to a local mortgage lender and let him/her know what you are trying to accomplish. The lender can give you your best options based on your financial situation.

Good luck with your purchase and hopefully your mom's health will improve with you to take good care of her!!