Expert: Dick Dennis - 3/19/2005

Question
My husband, mother and I live and rent my grandmother's home.  We want to buy the home from her.  The home appraised for 580,000.  My grandmother is willing to sell it to us for what we can be qualified for.
For a direct purchase we only qualify for 160,000 because of our debt.  In a refinance we would qualify for 365,000 after the loan paying our debt.  
Could we out our names on title, refinance, give her the check, and take her name off title?  We have been told to do this by a motgage bank, is this a legitimate way to buy the home?  Are there any pitfalls to this for any of us?

Answer
Apparently, Kristen, the refinance lender is using the value of the property as their protection and that is why they are willing to lend $365,000 on it. But I am sure they will require your grandmother to be on the loan (and title)as well.

Otherwise, you would not be able to qualify for a refi anymore than what you would in buying a house. They said you are qualified to buy a house valued at $160,000. Not the loan for that much. Well, maybe, depending on the lending program offered.

But getting back to your grandmother, the lender is willing to lend $365,000 to your grandmother, period. But it is up to your grandmother and you to execute documents as to who gets title to the property and how.

So you buy the property for whatever you can qualify for. To protect your grandmother's interest, you give her a second mortgage for the difference of the purchase mortgage and the ultimate purchase price. THEN you can refinance it for the $365,000, which would pay your grandmother what she is due and the title is in your name only. You are going to have virtually double the loan costs in all this process.

This should get you what you are looking for. But be aware that your grandmother may be subject to a capital gains tax they allow you if you have lived in the house for two (any two) of the previous five years. So, you should consult with a tax expert (this is very important!) to advise which is the best way for your grandmother to escape paying capital gains tax.

I do wish you well.

Dick Dennis,  dixiedee13@aol.com