Just wanted to add a few additional things to consider. Would you be okay if, for some reason, your son wasn’t able to make payments on the mortgage for an extended period of time?
For example: a job loss; a catastrophe resulting in a severe economic downturn; an accident resulting in disability; death; a serious, prolonged illness, the birth of a child with special needs?
Even though you know your child, you can’t know the future, so don’t lend anything you aren’t able to lose.
There are some pretty good first time home buyers programs available right now. Some areas even have down payment assistance programs. They could start out this way and refinance to more favorable terms down the road a bit when their financial position is stronger. They would be building their own credit and you would not have to be involved at all.
Massmomm - yes I would be okay if they couldn’t make payments due to the situations you outline above. If it was a job situation I could provide a job if necessary. If it was a more catastrophic situation I could tear up the mortgage. We have lived well below our means our entire marriage and have amassed a healthy net worth. Losing the cash would not cause us a financial hardship. We are well diversified and this money is just a small % of the money we have sitting in low interest bank accounts.
mom10grad, what if their marriage fails? Are you ok with the DIL walking away with half the house? (Sorry to be a downer. One of my kids had a short marriage to a delightful woman. Would have bet limbs that they would make it for the long haul.) Fortunately, no kids or house were involved.
^they aren’t giving them the house. The young couple is buying the house from them. The hypothetical divorced spouse is paying half for the house. Half of it is hers.
eta: I’m sorry. I’m interrupting. 
If they divorce - she will get half the mortgage in the divorce settlement.
“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.”
I guess you always end up with more than you want on cc. You just want to get an answer to a credit building question, and here we are all lecturing you about why this is a bad idea! 
It sounds like you have thought this out pretty well, and your family can handle it without any problem. Seems there would be a way for this to be reported to a credit reporting agency. However, if not, after a number of years when they are making payments for credit cards and other things, they could have a great score. Shoot, my kids have scores over 750, and one isn’t even out of college yet (they merely had additional cards on some of our accounts).
You have a couple of issues. First, it is the creditor who reports to the credit companies so it would be up to you to report the mortgage and payments. But you aren’t going to be able to do that because the companies aren’t going to take a letter from you every month. Credit reporting agencies get reports electronically every month from banks, credit card companies, big rental companies. It has to worth their while, and a single debt doesn’t matter to them. So no credit history.
Second, it’s unclear whether you are going to have a mortgage on the house. If so, it is not going to be an owner occupied property so your terms will be different. Maybe a higher down payment, maybe use restrictions. If you quit claim it to your son, the bank may not care but they may, so be careful as there will be a ‘due on sale’ clause in the loan and mortgage documents. Okay, then you say you want to file a mortgage. Are you in a mortgage or deed of trust state? May not be able to do it in a deed of trust since you’ll (parents) already have a deed of trust on the property with the deed in your name. If you’ve quit claim deeded it away, you’ve got nothing to deed to a lender.
For the taxes, your lender will send you the 1098 and other documents in your name. You’d have to issue a 1098 to your son for him to get any tax benefits, and you’d have to show the profits from the loan to him.
If that all works out, if you are in a mortgage state, it can cost you several thousand dollars to file the mortgage to your son. Some states charge by the page, some charge by the amount of the mortgage. Even if that all works out, and your son decides someday to refinance his mortgage (to you) to pay you off, and you’d pay off your bank, you are most likely going to have to redeed it to him as the title company won’t want to insure over the gap. The bank will likely issue a ‘purchase money mortgage’ not a refinance, as no bank would want to give a mortgage second or third in priority to your, your son’s to you, and then this mortgage.
This is just creating a lot of issues where there doesn’t need to be any. He’s most likely not going to get the tax and credit reporting benefits of a homeowner. Rent him the house with an option to buy.
I knew as I read the OP that even though she wasn’t asking for validation on the actual loaning of the mortgage, she was going to get a lot of people lecturing her about it anyway.
Both of my kids have great credit scores, tho D has never held a full time job and often has had no job. If they pay utility bills in their names regularly and CC bills, they will have fine credit scores, even if they never have a finance charge and never “borrow.”
If you have multiple children/heirs, make sure that the down payment amount is documented in your trust as an amendment, just to be fair. It would need to be deducted from their portion of the future inheritance. As trustee for my parents’ trust, I had to make a gift to my sister when she was having financial problems. I had to do some financial calculations to document it properly to be deducted from final distribution between the heirs- and I had to take into consideration that my Father was going to be taxed on the amount withdrawn from his IRA (probably not your case) and it was going to bump him into a slightly higher tax bracket for that year.
Regarding whether payments on a private mortgage will build credit, I don’t know. You have to balance that with whether you even want to report the interest received to the IRS versus giving the kids the mortgage interest deduction on their taxes and then it has to be reported between you as a 1099 INT. Heaven forbid… I didn’t mention that 
I wouldn’t prioritize building a high credit score either in this situation. I agree with himom post 29.
Hate to say it but that is what I was worried about too, and other potential legal pitfalls (inheritance issue mentioned above^^).
OP it sounds like you have thought it through. Sorry, didn’t mean to give a response on stuff you didn’t really ask about. Wishing you all the best - what wonderful parents you are!
Each parent can gift each half of the couple $14,000 per year. That comes to $56,000. Sounds like a nice down payment.
The original question was will their method build credit. The answer is no. I still suggest co=signing the loan and lending them (or gifint) the downpayment. That will build credit
I personally don’t see the big deal about building credit. More to the point, to me, it wouldn’t be worth paying a penny extra in interest (from the “real” bank) compared to what the “bank of mom and dad” would be at.
I’m another parent whose kids had top credit scores just from paying their credit cards every month. They had excellent credit scores when they graduated from college, because I had paid those cards off every month. This was unexpected to me, since the cards were in both our names, because they were minors when they left for college and couldn’t have a card all by themselves as far as I could figure out. After graduation, they got their own cards.
eta: Since I was cash poor most of my adult life, it has only recently occurred to me a credit score isn’t that important if one if able to pay cash for things like houses and cars. Doesn’t the score mainly impact what interest rate one is charged? And that only really matters on big ticket items? And the house is the biggest ticket item for most people?
@alh, I have heard that credit score can impact insurance rates, and I may not be correct, but I recall some rumblings about making it OK to look into credit scores for jobs.
One of my jobs required us to provide a credit report every year. One person balked and was told her job was terminated. I had no problem turning in an annual credit report.
Yes, I have heard that credit reports can affect insurance rates, and have always been glad to have a very high credit score.
You can gift them $50,000 some this year…and then on January first, you can give them the same amount for 2017. If they wait until January to buy this home, this would be a large down payment, one would,think.
I have known of situations where people couldn’t be hired because of bad credit, which seemed to be the result of defaulting on debt. It wasn’t because of a low credit score, I don’t think.
I don’t really understand how credit scores work.