My husband and I are purchasing a townhome for our son and his soon-to-be wife. They will be making payments to us. The title will be in their names via a quick claim deed at closing; however will be having them sign a mortgage so they have a legal obligation to pay. Is there something we can do so that they can use the mortgage payments to help build their credit history?
I don’t believe so, if you are serving as the bank.
Are you “forgiving” the amount of the mortgage that corresponds to the max you can transfer without incurring gift tax? (I believe it’s $14k for you and your spouse so $28k total to your son)
Lucky son and wife-to-be!
We are not planning to forgive any of the mortgage at this time. Our goal is to give them the opportunity to build some equity while making about the same payment they would be making in a decent apartment (at a very low interest rate.) I was just hoping they would get some credit for paying the mortgage on time when they apply for credit in the future.
I’m confused. Mortgage rates are incredibly low. They could probably get something for 3.5 % or less. Do they not qualify? Could you loan/give them a down payment if they don’t have one?
This sounds like a solution looking for a problem. Why get mixed up in your kid’s finances like this if they can get a great deal in their own? And build up their credit score. If the payment is late or not there, there will be resentment. One of my favorite Dave Ramsey quotes is, “The borrower is slave to the lender.” Why do you want that in your relationship?
Busdriver - They are graduating from college in May, do not have money for a down payment and only one of them has secured a job. With 2% unemployment in our city the other one will be able to find a job doing something (maybe not in their field of study) and they will comfortably be able to afford the payments. I am pretty sure they would not qualify for a bank loan at this point.
We will be charging them less than the bank rates you noted above. I suspect this will be about a 5 year home since it is only 2 bedroom and I don’t suspect they will wait long to start a family. I am honestly not worried about this causing strife in our relationship. I was only inquiring as to how they may be able to use the payments to build their credit. If that isn’t possible, we will help them out as needed when they are ready to move and take on a traditional mortgage.
We bought our house from our in-laws when we got married and they held the mortgage. It was a legal document with an attorney, they filed the proper tax forms reporting the interest they earned from us and we were able to deduct the interest on our 1040. I don’t know if it was reported to credit agencies though. I never thought about it.
A quick search turned up some (old) info that a private mortgage can be listed with a credit bureau as a one time update, but you can’t regularly update their payment history. There are loan adminsitration companies which might do it, for a fee of course.
I would think the easiest way to gain a credit history would be for them to try and get a real mortgage as soon as they can. Once they are paying to a bank instead of you the credit history will come. It’s not going to help them if 5 years down the line they want to buy a bigger house and they still don’t have a good credit history.
It seems to me (as an extremely non savvy finance person) that at the current time those who don’t like to buy stocks, may like to use their savings (earning less than 1% interest) to buy property for kids and let those kids pay mortgage to parents at under mortgage interest rate but over bank saving account interest rate. Win/win for everyone. imho.
I would ask my accountant the credit building question. Do they finance their cars? Do they use credit cards?
adding: and again this isn’t something I really understand, but — If you serve as their bank, but they end up with lots of equity, don’t they have the collateral they need when they want to take out a loan? Do you need much credit history with collateral?
Why don’t you just cosign and lend them the downpayment?
alh - What you describe is the scenario. We have cash that is making next to nothing in the bank, the kids would like to build equity instead of throwing money away on rent and our relationship is such that I am not worried about causing strife. If it was to implode somehow it would come out of his inheritance - but I am not concerned about that. You are also correct that they will have equity built up that they can use for a down payment.
They do have credit cards that they pay off monthly and she will have some student loan debt that they will be making payments on. I assume both of these would count towards building credit history. We are also going to be making payments against her student loans as a supplement to what they are paying. The goal is to have them debt free except the mortgage in 5 years so they can get on with their life with stable financial footing.
Ah, I understand. It does make sense, and if there’s little risk of late/no payments, sounds like there shouldn’t be a problem.
I think a lot depends on the kid and your relationship. A couple of times, my parents loaned us 10k for a down payment, with a gift letter saying we never had to pay it back (for the banks benefit), and we paid them back within a week. My sister borrowed 40k to consolidate debt and paid on it monthly. My parents were irritated that they had cable, and any purchase, while they were owed money. Finally my sis disliked it so much, her husband sold off some stock earlier than he would have liked to, but they hated the feeling. It can be hard to owe people money!
I would be uncomfortable lending anything to my kids that I could not outright afford to give them (even if I didn’t give it to them right away).
I don’t want to be in a lender-borrower relationship with my kids. That being said, I would give them pretty much anything I had.
Of course there can be tax implications with some of this stuff too. My comments are more from a philosophical perspective.
Sorry I don’t have more info on how they can build their credit paying you back. That’s where I liked the idea of you giving (or ‘loaning’) them the down payment and letting them get the mortgage.
Sorry, I would have the S and DIL figure out how they can save enough for a down payment and afford a mortgage. It might take them a while. Living in an apartment while they adjust to new careers, marriage and saving is not an unreasonable expectation. Learning how to budget for “wants” is an important lesson to a newlywed couple and will set the stage for how they deal with finances going forward. I’d say let them grow together on this one. And if they are going to have kids soon, they REALLY need to figure out budgeting together, because they’ll either have a parent at home or day care expenses and that really changes the economics. And do you want the Bank of Mom and Dad to be open for whatever else they need? And what if they can’t pay the mortgage? If you give them a quit claim deed upon purchase and they later default, the ugliness could be epic.
To me, this is substantively different than parents offering to HELP with a down payment. DH always liked the idea of “matching funds” when the guys were growing up. We’d pay X for sneakers/jeans/toys. If they wanted a more expensive brand, they had to come up with the difference. Amazing how they found the less expensive things perfectly acceptable, and how they SHARED Pokemon decks! 
I will admit to my bias – DH and I got no help from parents for UG, wedding, grad school, buying a house or kids’ college expenses. We were married 14 years and had two kids in elem school before we bought our first (and only) house. Student loans and day care came first. We would help our kids in a minute if there were a serious medical issue or other catastrophic problem, but would not put ourselves on the line for a mortgage for them. We paid big $$ for their choice of colleges when they both had excellent scholarship options. That was our choice, and we were lucky we could do it. OTOH, they both knew that their choice of college would severely limit what we could do going forward.
busdriver - I completely understand what you are saying. If it implodes it will be a gift against his inheritance; however I am not concerned about that happening.
This isn’t an unusual scenario in my family. It can benefit older and younger generation financially. Worst case scenario, the person holding the mortgage owns the property I think. They can’t really lose out financially, unless the real estate market falls completely apart again. Usually the mortgage holder writes something into the will to explain what happens if they die while holding the mortgage, and even it all up, since there is usually more than one child inheriting.
This really does make more sense to me than keeping money in the bank at less than 1% interest. 
I am investigating it myself for kids living in low enough cost of living areas it may be feasible.
“Why don’t you just cosign and lend them the downpayment?”
There are government / tax implications of giving them such a large amount of money, no?
If the goal is for them to build credit, this isn’t going to help. If the goal is to help them buy a house before a bank thinks they can afford one, then this is fine. There is no way you’re going to be able to satisfy both goals with this solution.
I’m with those who say never lend to family. Either give it as a gift, or don’t give it at all. It’s cleaner. But every family is different and if you can afford to lose the money without resentment on your part, go for it.
You can gift to your child and your child’s partner, annually, so that is a pretty nice down payment, pretty fast in most parts of the country.
But some who may not be in a financial position to gift all their kids/spouses in this way, may be in a position to make money from holding a kid’s mortgage. imho.
Once the mortgage is paid off, there is a theoretical pot of money that is able to be divided among all the kids as inheritance, and it is more money than it would have been sitting in the bank. Unless the parents use the mortgage payments to supplement retirement income, which has also happened in my family in previous generations.
I have a whole lot more confidence a family member will pay a mortgage to me than that stocks will pay me. Also, I can just repossess, if necessary. Obviously, I am not very mainstream in these views.
adding: none of my siblings who had mortgages held by parents or in-laws had any problems getting credit ever, as far as I know, and I’m pretty sure I would know, because we are that kind of family, and we have a family partnership/business we are all involved in and credit worthiness would probably have come up at some point.
Southfloridamom - We could afford to outright give them the money without impacting our financial health if we chose to; however we do not want to do that because we don’t have a desire to reduce their incentive to work. We could also provide a job for one or both of them, but again we understand the importance of working for someone else and making their own way in the world. That isn’t to say that someday we wouldn’t hire them into our family business if they were the right match. They are hard working, capable and responsible kids who have given us no reason not to want to help them when we can.
They did not approach us about financing a house. We offered it to them with the understanding that it will be their house, and that they would be signing a mortgage. The mortgage will be a financial obligation just like a bank mortgage or rent payment due a landlord. The total all in payment with principal, interest, property tax, HOA and insurance will be right at $900/month. I am not worried about their ability to make the payments.
I was really wanting any guidance someone might have on how to use the mortgage to help build credit. I understand we all have different philosophies on how this may be good or bad. We have chosen to do this and have considered the ramifications. We feel it is a risk that is worth taking. If they decide they don’t want us as their mortgagor we will gladly help them get into a traditional mortgage.