Ask the grumpies: Intra-family mortgage or wait to buy?

Sapience asks

Do you have any thoughts or recommendations for dealing with intra-family mortgages? I’m up for an academic job at a relatively stable school in a part of the country where I could afford to borrow the entire cost of a (very modest) house from my parents. My parents have offered to the possibility of doing an intrafamily mortgage so I don’t have to worry about as big of a down payment (probably what would happen is I wouldn’t do any down payment, but would use some of the money I would have spent on the down payment on renovations, furnishings that I don’t really have right now, etc.). I know it has to be registered and that there’s the minimum interest rate required in order for it to be taxes as a mortgage, but are there any other benefits or pitfalls that I should be aware of if we go this route?

I’ve got the 20% for a downpayment, but was planning on putting off any renovation until I had more cash. My parents were the ones saying that instead of delaying renovations till I have the additional money saved up I should just do it all at once before I actually move in.

If you don’t have a 20% downpayment, don’t buy a house. Period. Don’t borrow for furnishings. Include the cost of renovations in the cost of the house when you’re doing your budgeting (meaning you need more money rather than less money to get 20% down).

It’s very nice of them to offer, but I’ve been seeing so many people (online mostly) with really good incomes hurt by not doing the recommended thing when it comes to housebuying and renovating.  What happens is they get crunched on cashflow from the monthly cost of the mortgage added to the unexpected additional costs of homeownership, which means they can’t live on >100K in, say, Indianapolis or on 175K in San Francisco.

There are definitely benefits to doing renovations right when you move in (see: living with carpet in the kids’ bathroom for 10 years), but that would argue for putting off buying until you can afford them rather than having too much debt servicing during home-ownership. Because home ownership really does bring in a lot of additional required spending over renting that people just don’t expect. A little more hassle from renovating later (if you buy) is better than having to worry about your cashflow on a regular basis, just in terms of stress levels.

Also, as Rosa notes:  “there are also downsides to doing all the renovations up front. You might not like them as much, since you haven’t actually lived with the space to see the real deficiencies. You will probably still need to redo them in 10 or 15 years. And you may find other priorities that you didn’t see before you moved in, but have already spent your reno budget.”

24 Responses to “Ask the grumpies: Intra-family mortgage or wait to buy?”

  1. Leah Says:

    Additionally, if you’re moving to a place you’ve not lived before, I highly recommend renting and waiting to buy a house. The neighborhood or area of town/city that you seem to like when you’re looking might not be the best when you really get there and settle down. Renting lets you see traffic flow/patterns and where you’d personally like to live as you get to know the place. Try to rent the smallest place you can stand so you can save more money for the house purchase. Plus, a small place means less time cleaning and more incentive to get out and explore your area.

    • chacha1 Says:

      +1 on renting before buying. Unless you are really familiar with the town, there can be a surprising number of pitfalls.

      • Rented life Says:

        +2 on renting. We moved back to a city we had lived in for 7 years (then briefly moved away to figure stuff out). Been renting for 3 years and I still can’t fully decide where I would buy–so many pros and cons to each option. Had we bought right away we would have regretted being stuck.

  2. Rosa Says:

    Whoo, you quoted me! Watching w.hat everyone else seems to do, I feel like the only person in the world who actually prefers to wait on most renovations. And now we’ve lived here long enough that we actually have redone some stuff we did right away (had to replace the roof on the garage again, boo. Need to repaint the interior, too.)

    I can’t second what Leah said enough.

    And if you look at it from your parents point of view, is it smart for them to own your mortgage? Usually for individual investors, a single mortgage is a big chunk of their portfolio to invest in. And since it sounds like you have a good relationship already, you are already mutual sources of possible support if something goes wrong, so it’s even less investment diversity to also lend you a big chunk of money. Would you advise them to do that if it weren’t you?

    In my family, the dynamic if we owed a lot of money to our parents would make me really uncomfortable. But families differ on that a lot. If you do it, DEFINITELY have a 3rd party handle the contract, even if it seems to your parents like an unnecessary cost.

    • chacha1 Says:

      My feeling is that if you have the income and the downpayment to qualify for a conventional mortgage, do that instead of running it through family members. That is a situation simply fraught with potential for mayhem. My sister received help buying her first house from my parents, and in consequence had to put up with a whole lot of well-intended but intrusive “advice” for … as long as she owned the house. Of course, that may be part of the family dynamic anyway, but why put the leverage of money behind it?

      • Leigh Says:

        +1 My parents gifted me part of my down payment and that gave them the idea they had a ton of input into what I bought. That’s part of their personalities anyways, but it’s much easier to push back on that when they have no financial involvement. If I could go back in time, I would have waited another 6-12 months longer to buy instead of taking their money, even though I would have needed a much larger down payment.

      • Rosa Says:

        My mom gave me money toward our downpayment, several thousand dollars. My grandma also gave me several thousand, in lieu of a wedding gift because we weren’t planning on getting married, and that caused mild drama but it was between her and my aunts, nothing aimed at me. No strings or interference involved, though maybe if they thought we were making a bad choice there would have been? My family LOVES my partner and approves of all financial choices involving him though. Also, we never asked them for money – we were actually pre-approved for a loan before we even told them we were house hunting, and they volunteered that they’d planned on giving us money toward our first house.

        So I can imagine a family where owning the whole mortgage was normal and expected and didn’t come with strings…but that is definitely not my family, on any count. There would be so many strings on a six-figure gift or loan. My parents actually did buy a house for one of my siblings, much later, but only on a temporary emergency basis. It came with a lot of strings (mostly “you will learn to manage money the way I approve of”) and an expectation that the sibling would get a regular bank mortgage ASAP (and that sibling did. It was just a lot harder to get a mortgage in 2009 than 2002.)

    • Jenny F. Scientist Says:

      I think cosmetic renovations should wait for some living-in. Structural repairs and things like AC so green fuzz won’t grow on everything (oh, the South) sometimes need bumped up in priority. We’re waiting on bathroom reno until the kids are older/ we have more money but the caving-in garage wall had to be renovated and rewired right away.

      • nicoleandmaggie Says:

        Re: the structural repairs– we had the seller fix the major ones that showed up in the home inspection before we moved in (though in our case, that was really just a drainage issue). YMMV on their ability to do that.

      • Jenny F. Scientist Says:

        They weren’t willing to in our case, but it ended up being ~$4000 so not ridiculous. Also we had an extra $30k left over from previous house sale, some of which was budgeted for repairs! (Our mortgage rate is so low that it’s not worth it to pay it off early.) Also our house in particular, we paid about 50k less than they were asking, so I think that’s where the negotiating came in. They did fix a few things that were safety issues- furnace problem and gfci in kitchen and bath.

      • SP Says:

        We did some “structural” fixes shortly after we moved in and my in-laws asked us why didn’t make the sellers fix them. It’s just not an option in a sellers market (as you acknowledge, YMMV), but you generally can identify these costs in advance. Almost every house we saw had something that needed to be done. Extreme termite (or WDO, wood destroying organisms) damage seemed to be a theme that I did not know about before house shopping.

        Similarly, in laws asked if we offered the full asking price. “Well, we wanted the house, so…”

      • Rosa Says:

        our house had some structural fixes actually required by the city for sale, and it was a seller’s market, so we had 3 months after closing to fix them. We managed to do them on the cheap by supplying all the labor ourselves, with a lot of help from friends. One of the benefits of buying when you’re in your early 20s and your friends still think construction work is an entertaining way to spend the summer.

  3. Kay Cookie Says:

    My brother has a mortgage from my parents because he couldn’t qualify for one on his own (too low of salary for him and his wife). He has since lost his job due to work-related injury and it is a financial stressor for both his family and my parents. It also has made some messy dynamics among the siblings, although they are kept under wraps, the feelings are there. Generally, if you couldn’t get a mortgage in the market under certain conditions, it’s probably not wise for your parents to make the mortgage. My parents are doing well financially, but because my brother and his mortgage is a wildcard, they feel like they can’t downsize or make major life changes because they just don’t know what will happen there.

    I do have to say, as soon as my husband got his first real job as a professor, we moved right into a house and I’m glad we did. We had rented little apartments with no outside space for 10 years and had 3 little kids, one of whom was in school and we didn’t want to have to change schools later and there just weren’t rentals in the elementary school we wanted to be in (actually almost no rentals that would fit our family since houses are cheap). And we were just SO tired of moving. It worked out fine for us, but mostly because it is a small-ish university town in the South and there were only a couple desirable places for professors to live anyways. If we had been moving somewhere bigger, it would have been much harder to figure out where to live. So, I think there are certain times and places it can make sense to buy instead of rent.

    • Leah Says:

      I think the decision is different when you have kids and have to think about switching schools. That’s a time when it’s worth the effort to investigate the town and make the best possible choice you can.

  4. gasstationwithoutpumps Says:

    Unless you are deliberately buying a fixer-upper, you should definitely delay any renovations. The changes I’ve made in the 29 years I’ve owned my house are not at all the ones I thought I would be making. We have repeatedly opted for more light, better windows, and more insulation, rather than more room. We converted half the garage to a book room rather than adding on new space.

    Doing a smaller renovation project once every 10 years is much more likely to get good results than a more massive project every 30.

    I also agree with the idea of renting for at least 6 months before buying, to be sure of the neighborhood you buy into. If you have previously owned a house, though, there are (or used to be) tax advantages to replacing it within a year of selling it.

    • Rosa Says:

      no more! Now you’re exempt the same amount of gain ($250,000 for individuals, $500,000 for married filing jointly) no matter what you do with the money.

      That “tax exempt only if you’re moving upmarket” thing was such a weird facet of the tax code.

  5. middle_class Says:

    I don’t own but I daydream about renovations like most people daydream about hot Canadian actors. So even in our current rental house, we talked about renovations we would do if we own. Now that we’ve lived here for a year+, we definitely have changed our mind on certain things. It’s true that you don’t really know what renovations you really need until you live in a space.

  6. chacha1 Says:

    My parents bought someone else’s dream home in Florida and immediately started renovating. They are out well over $60K, and a lot of hard physical labor, on things they did that have had to be re-done because they started before they had spent any time living with the seasons in that house.

  7. Katherine Says:

    We’re planning to buy a house in our new town the is summer. It’s a pretty small town, and we REALLY don’t want to live in an apartment any more. Or move all our stuff again if we don’t need to.

    We’re also getting a family mortgage, but we could borrow more from a bank if we wanted to go that route (we’ve been pre approved by a bank to borrow twice what the family member wants to lend to us). We’d rather have q smaller loan with a shorter repayment term anyway. I was pretty wary of a family loan, especially since this person (and hir late spouse) previously bought a home for then or child to live in and that ended badly, but other family members have more recently gotten a family mortgage from hir and are having a very good experience.

    I would never let anyone give me a loan for an amount of money that I couldn’t borrow from a bank. I wouldn’t want to expose a family member to that kind of risk, or risk overextending myself.

  8. Contingent Cassandra Says:

    I know of one family mortgage that worked out well, but the borrower had already owned one house, and was moving back to her hometown, which has very good schools, from not very far away. Basically, her parents were helping her make up the difference between what she could easily afford and what houses in that school district cost so that their grandchild could get the best education possible. And the grandparents owned extremely valuable land that could be sold if need be (and the proceeds from which she and her siblings would eventually inherit). And she didn’t renovate until some years later (by which time I suspect she had payed off the mortgage. Also, she had an unlikely-to-disappear (and likely to be replaceable if so) government job.

    At the very least, you’d want to be sure that the house could be sold at any time for at least the current value of the mortgage. So if the school turned out to be less stable than anticipated, or tenure (if relevant) didn’t happen, or eventually disappeared due to a department/division reorganization, you (and they) wouldn’t be stuck with the house and/or debt.

    The only upside I can see (and an incentive for the parents) is that the interest from a market-rate mortgage would probably be double or triple what they could get from a bank these days.

  9. First Gen American Says:

    Delay renovations for sure. Like neighborhoods, you learn a lot about what you do and don’t want from renovations by living in a place first. In all my renovations, I would have missed important details had I gone with my first instinct. Time living in a place often uncovers inefficiencies.

    If you can’t afford a traditional mortgage at these low interest rates, I’d question why you are considering buying on your family’s dime. I’d keep family out of it for many reasons. Maybe if interest rates were crazy high, it would be a different story but it doesn’t make a lot of sense at today’s rates (and I am about as anti debt as they get).

  10. Sapience Says:

    To add a bit more info: it’s somewhat the expectation in my family that, unless you’re buying a house that is out of their price range for cash, it will be an intra-family mortgage. It’s not that I can’t afford a traditional mortgage, but that they don’t want me to get one. The suggestions they are making are pretty much the way they (and all my dad’s sisters) did it with my grandfather, though in most cases they weren’t renovating, they were building new.

    It looks like I’ll be waiting to buy, as I’ve discovered that I might have some major medical expenses this summer, and buying would put too much pressure on my cash reserves if that happens.

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