They can build credit by paying off a car on time.
I’d be sure that my initial investment in the house be considered a loan. In case of divorce, that $ comes back to you, not DIL.
If your goal is to help them build credit, adding son to your credit card(s) as an authorized user that have an excellent credit history is the best way to accomplish this.
The scenario of you buying a property for cash, quit claiming it to them, and then they pay you a mortgage pymt monthly does nothing to build their credit as it is not a loan with a lender who reports to the 3 credit bureaus monthly.
I did add one kid as an authorized user to one apiece of my CC’s. Their credit history is now older than they are! They and I make it a point to pay off all balances in full as soon as they post and never pay interest or finance charges. We all have excellent credit scores and histories.
I’ve been assuming the OP and spouse bought the house outright for cash. Then they are selling the house to their son and his partner. So son and partner have equal financial interest in house from the beginning. They get a better than market interest rate because parents are holding the mortgage. To me, this seems to really avoid the whole issue of gifting houses and what happens when a kid divorces. And the kids begin building equity immediately instead of paying rent. As long as this is in a locale where it makes more sense to buy than rent, it’s a great wealth building tool with very little downside. imho. I am trying to understand what the quitclaim deed referenced in the OP means in this context.
I titled the thread incorrectly which is probably causing confusion - we aren’t buying them a townhome we are just playing banker. In addition to the lower interest rate and no down payment, this will help minimize the closing costs (no loan origination fee.) They will save approximately $100 a month in interest that can go towards her student loan debt. Additionally we are actually going to take the monthly interest payment and use it to help pay her student loans down. So it effectively is an interest free loan.
The general consensus seems to be don’t worry about whether this loan will help improve their credit score. Thank you all very much for your opinions - I knew I would get many by posting here :-).
I agree with alh. If I were to do something like this with my kids, that’s how I’d structure it - pay cash, have kid treat me as the bank and pay mortgage at low interest rate, and then forgive the relevant amount each year up to the $14k per person per recipient. Like alh, we are cash- only people so credit rating isn’t all that important.
We bought our first home on a 5 year land contract from a family member. And we sold a home to a newly minted college coupon on a very short term land contract. Perhaps you could talk to your bank or a lender about creating a land contract between yourself and the kids, it could be a short-term one until they can mortgage the townhouse themselves and pay off your mortgage.
We are also cash only people. I have no idea what my credit rating is.
PG #45
^^I think maybe you mean you agree with mom2010grad. I have not purchased any houses for any kids to buy from me instead of a bank. I am only thinking about it so far as I watch interest rates. It will have to be a very inexpensive house and I don’t know who will be willing to live in it to help me out.
Someone on here will know the answer. Can’t you gift your kids any amount you want as long as it is equal coming out of the eventual final inheritance? This came up in an estate I was involved with and that is my memory of the conclusion. It was very confusing though at the time.
cross posting on this fast moving thread. Clearly a hot topic for some of us.
Momofthreeboys - we did consider the “land contract” concept; however we do not want our name on the property due to liability issues. If an accident happened at the home we wouldn’t want to be the ones getting sued (since we have significantly more to lose.) I think our best bet will be to close on the home as we have it structured (the closing is next Friday) and look at helping them get into a traditional mortgage a few years down the road if that is what they want (or if we come across a better investment for the money :-).)
Although we could “gift” the home to them (and adjust the inheritance so that both kids get an equal amount) we feel that could be detrimental to their ambition. For this same reason we don’t have our entire estate going to our kids and the part that does go to them would be paid out in increments when they reach certain chronological milestones (just in case we both meet our demise before they reach the magic age in the will.)
One can build a good credit score without a mortgage to report through credit card use and installment loans (auto, student loans). My S doesn’t own a home and has a score in the lower 800s.
I assume (may have missed this) that you are buying the townhouse for cash and then selling it to your S and future DIL and seller financing the purchase. FWIW, I think that’s a great idea.
If you are not paying cash and have a mortgage that will remain on the property at the time of transfer to your S, that may be problematic (due on sale, owner occupancy, insurance issue, sometimes property tax issues). If you are paying cash, there is no reason to use a Quit Claim Deed. A Quit Claim Deed is typically used to confirm title in someone who is presumably vested with title (like correcting property boundary or title issues), transfers among spouses, or transfers without value. Because your S is actually buying the property from you, you may want to consider transferring title by Warranty Deed. I would also make sure you have a Promissory Note and record the Mortgage (priority over later creditors, judgments). Essentially, treat this the same as if you were an institutional lender - just without all the hassle and far less paperwork.
“Someone on here will know the answer. Can’t you gift your kids any amount you want as long as it is equal coming out of the eventual final inheritance? This came up in an estate I was involved with and that is my memory of the conclusion. It was very confusing though at the time.”
Pretty sure you can, and this is how I understand it. I’m sure someone will correct me if I’m wrong. if it’s above the limit for the year for each person (what is it this year, 14K?), then you have to file a form with the IRS. Of course, it can be that amount from you, your spouse to your child, and their spouse. The amount that you have gifted any one person that is over the annual limit, just counts against your estate when you die. For example, if inheritance tax starts at 5 million, and if you have gifted 1 million over the limit, then the inheritance tax starts at 4 million. Not much of a player for most people.
I always get irritated when I hear people talking about the “gift tax”, like they think they have to pay taxes on a gift they’ve given!
Overtheedge - Thank you for the information regarding the warranty deed. I will look into it further. You are correct that we are the buyer of the townhome and are paying cash (there is no mortgage with a bank involved.) We are then selling it to our son and future DIL and financing the purchase. We are going to have a signed Promissory Note. I also started looking into the process to record the mortgage with the county. I appreciate your advice.
Just chiming in to say your kids can have a great credit rating without a mortgage on their record. Has either one had a lease? Utilities in their name? Car loans? Student loans paid on time? Credit cards paid on time? (Bonus if they have been long time “authorized users” on your long time accounts.)
I thought I understood credit ratings very well until I discovered our DD2 had a rating near the tippy top - nearly as good as ours, as a recent grad with no car payment or mortgage. Of course she’s benefitting from being a user on an account older than she is.
I wish our kiddos lived in a spot where we could afford to help them like this. A two bedroom condo in our daughters’ city would be way over the $900 payment you mentioned. Heck, one is paying far more than that for a studio.
edit - I just read your last post. Why are you doing that? Seems like an extra unnecessary transaction. We went to closing with my son as the buyer and we just wired the money to his(our) attorney. We were involved and made the arrangements but our son was the buyer and we were the lender.
There ya go! This is exactly what we did for our son. We made it very clear that HE was buying the condo, he is the owner, and that we were making the loan. Yes, it was a very favorable loan he could not have gotten from a bank no matter how good his credit: 100% of the purchase price, interest only for 9 years at 3.75%. (Interest only to keep his monthly payment as low as possible) One of the motivations for this transaction was he ended up with a monthly payment lower than rent. It is also very good for us because we need income and the cash was sitting in the bank earning nothing. I consider it a very safe loan because our son is very employable and trustworthy, not to mention the condo (in a very hot Boston market) is now worth 30% more than he paid for it.
I don’t think I can help you with the credit score reporting, but one thing I did learn, is that for the borrower (your kid) to be able to deduct the interest on his tax return, you must record the mortgage. When I first read that I freaked out a bit, but discovered that the real estate attorney we hired - who drew up the mortgage papers, also recorded it.
NJres - were the papers you had drawn up complicated legalese like you would find with a bank mortgage or was it pretty straightforward simple promissory note?
In my former life I made mortgage loans for first time homebuyers. We would often establish credit in non traditional means, by utility bills etc. If S goes to buy another house later and needs to document credit history, he can provide copies of cashed checks that show he made his payments to you monthly and on time. A creative lender might consider that.
dragonmom - our son actually is a user on one of our long term credit cards. He also has had his own card for about 3 years that he pays in full each month. Our son has always lived in dorms or the fraternity house and has never had a car payment. Future DIL also has a credit card, lives in a campus apartment and will have student loan payments so they will be building credit history by paying the loans on time.
It is actually a seller’s market here right now - anything listed at $150k or less is gone within hours. For $140k we purchased a 1270 sq foot, 2 bedroom, 1 1/2 bath, 2 car garage townhouse built in 2009 by a well respected builder on the outskirts of town. The same property sold for $125k in 2010. The seller is a young single lady and the place looks like no one ever lived in it. We are in a growing city and our rental market became pretty tight when builders pulled back in the 2008 recession. As a result rental rates have gotten pretty high and they are just starting to bring enough units on the market to help stabilize it a bit. Fortunately we benefitted by investing in a few of the apartment developments at the right time!
Oh goodie, my engagement ring banner ads are now mortgage ones. If my son picks up my iPad he won’t think I’m advocating anything, lol.
What about transfer tax? If you buy the townhouse for cash, and then turn around and sell it to son, you are paying transfer tax twice. Two transactions - two taxable events.
Why not have son and his fiancee be the buyers from the start - with you as the lender. Who is handling the closing? Have the title company or real estate attorney prepare and record the mortgage and deed of trust documents for you and record them.