Borrowing money to buy a house

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michael8975

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Greetings all,
I need some ethical advice. I am currently in the market to buy a house, but discovered after speaking with a few lending institutions that the down payment I had saved up wouldn’t get me much. But both institutions seemed to indicate(off the record) that if I borrowed money from my parents and kept it in my account for two months(making it look like it was mine) and provided receipts, it would be fine. So my parents have floated me the loan and I am currently sitting on the money and waiting. I am pretty sure this is unethical and am considering giving the money back. Is there a legal and ethical way to borrow money from my mother and father? Any comments or suggestions would be greatly appreciated.

–michael
 
Well, I work in the mortgage industry and this is a very common practice. The thought behind it is to alleviate an underwriter thinking you may have to pay the money back, which in your case is probably what will happen. There are many lender’s who will allow gift funds from parents. There are also many lender’s who will allow for your parents to place a second deed of trust on the new home and treat the money the same way any other lender would treat it. The difference is that your parents can write a note with their own terms. For example, they can write a simple interest only note with a low rate so you can have an affordable payment.

In response to whether or not the practise you asked about is unethical, I guess it depends on how you look at it. Let’s say for example that mom and dad loaned you some money to go out and buy that house. Lets also say that it took a few months to find the house you wanted. As a lender, if you showed me two months worth of bank statemnets showing that money already in your name, I would ask no more questions. Your dilemma is a little different and you need to make that judgement call as to whether ot not you are being unethical. I wonder how much is being loaned. There are many ways to structure a loan to make the payments more affordable thereby giving one more money to spend on the house itself. Talk to your lender about interest only loans. You can always use this type of loan to get into the house and then refinance into a fully amortized loan later.
 
Hey Rich,
Thanks for the help. This second deed of trust sounds like an interesting option as this money would definitely not be a gift and I’d be paying them back($6500). Maybe I’m being a bit scrupulous, but it just feels wrong somehow. Anyway, your advice is much appreciated.

–Mike
 
I am not in the mortgage business but I must disagree about the interest only loans. From what I’ve heard they can be a risky proposition, so you should do your homework. Heres an example:

From what I understand most if not all interest only loans are variable rate loans and the interest only period ends at some time (ie. 5yrs) and you are forced to refinance. Right now we are in a period of all time low mortgage rates. (which means they probably only have one way to go) So you get an interest only, adjustable rate mortage so you can get more house for your money. Then rates climb and so does your monthly payment. Then your interest only period ends and you have to refinance with an amortizing loan which will have higher payments since some principal is included AND the rate will be higher because interest rates have risen. You may then or even before that point find yourself unable to make the payments.

Please anyone correct me if I am wrong on any of these points. I just think that on most occasions it is risky to guess that your income is going to grow faster than your mortgage payments. You can play with a mortage calculator to see how your monthy payments will increase. There is one here:
jeacle.ie/mortgage/
Here is a good website on mortgages I found with lots of Q & As:

mtgprofessor.com/
mtgprofessor.com/Tutorials2/menu%20of%20tutorials.htm

My wife and I are being relocated to Cleveland and if we sold our house we would take an enormous loss so we are keeping it and renting out both top and bottom.(It’s a 2 family house) Since we are doing this we qualify for a smaller mortgage in Cleveland and houses are more expensive there. After re-evaluating our needs in house we decided that we can really get by with a smaller house and if someday we need a bigger one to accomodate our family size then we will re-evaluate our finances. For us the interest only mortgage is not worth the risk. It may be different for you. Everyone’s situation is different.

I’m not sure about the morality of your situation, but if you don’t feel right about it then look for other options.
 
Hello Renee,
Thanks for the advice. It is very tempting to get a bigger house than you can afford…I am already falling into that trap. I looked at your blog…how is the renovation of your victorian coming along?

–michael
 
Slow, but we do what we can when we can afford to. We plan ahead and we take advantage of Home Depot’s 12 Month interest free dates to buy stuff. Also we are creating equity in the house.

Our problem was that we had great credit, because we paid everything off. Since we paid everything off we didn’t have much of a down payment. You can’t win.
 
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timbo1980:
I am not in the mortgage business but I must disagree about the interest only loans. From what I’ve heard they can be a risky proposition, so you should do your homework. Heres an example:

From what I understand most if not all interest only loans are variable rate loans and the interest only period ends at some time (ie. 5yrs) and you are forced to refinance. Right now we are in a period of all time low mortgage rates. (which means they probably only have one way to go) So you get an interest only, adjustable rate mortage so you can get more house for your money. Then rates climb and so does your monthly payment. Then your interest only period ends and you have to refinance with an amortizing loan which will have higher payments since some principal is included AND the rate will be higher because interest rates have risen. You may then or even before that point find yourself unable to make the payments.

Please anyone correct me if I am wrong on any of these points. I just think that on most occasions it is risky to guess that your income is going to grow faster than your mortgage payments. You can play with a mortage calculator to see how your monthy payments will increase. There is one here:
jeacle.ie/mortgage/
Here is a good website on mortgages I found with lots of Q & As:

mtgprofessor.com/
mtgprofessor.com/Tutorials2/menu%20of%20tutorials.htm

My wife and I are being relocated to Cleveland and if we sold our house we would take an enormous loss so we are keeping it and renting out both top and bottom.(It’s a 2 family house) Since we are doing this we qualify for a smaller mortgage in Cleveland and houses are more expensive there. After re-evaluating our needs in house we decided that we can really get by with a smaller house and if someday we need a bigger one to accomodate our family size then we will re-evaluate our finances. For us the interest only mortgage is not worth the risk. It may be different for you. Everyone’s situation is different.

I’m not sure about the morality of your situation, but if you don’t feel right about it then look for other options.
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The Mortgage Professor is one of the biggest problems with our industry. He’s just as bad as Suzy Oreman. They give advice based on their personal opinions and don’t bother to take into consideration what the real world is all about. They both fail to look at each person as an individual. In my honest opinion there are better things to do with my money than give it to the bank. If the Real Estate market crashed tomorrow, your so-called equity would be lost. Equity does nothing for you. It is considered a dead dollar as it doesn’t earn you anything. The value of your home will go up or down no matter how much you owe on it. Thanks to interest only loans, I have been able to put many people into a house that they own as opposed to rent. I teach my clients to take the money they would have sent to the bank towards principle and put it into some other investment vehicle. Interest only loans aren’t for everyone, but, be careful to give advice where you have no experience. If an interest only loan meant home ownership versus renting, I would take the interst only anyday!
 
Why borrow money to buy a house for down payment? We purchased our house with $0 down payment and had to only pay closing cost. We had to pay PMI, but a year later refinanced and because of the equity the PMI went away. Use the cash for other things you may need for the house. The interest on the note is deductible.
 
Rich,

First of all, I’d like to keep this friendly. You said interest only loans aren’t for everyone. That is the only opinion I was trying to give. If I am presenting things that are false please let me know specifically what, because I would like to be well informed. Was I completely off when I said interest only loans were usually adjustible rate mortgages? Are the rates for them typically slightly higher than non interest only rates? If you do an interest only mortgage aren’t you only giving your money to the bank? I don’t want to bog down this thread with conversation that the poster may not be interested in so please pm me or email me.

My main point for this thread was that yes interest only loans are for some people but I don’t think they are the right solution to use so you can get a bigger mortgage, and that, Rich, is the context you suggested them in. If someone is getting an interest only loan because they can’t afford a bigger payment, then if the payment on an interest only loan can increase with the interest rate, isn’t that a little risky?
 
hey timbo,
thanks for your advice. interest only loans do scare me a bit as well, since the interest rate can change. i’m a big fan of stability. although i work in an unstable field(advertising), so it might be nice to have the option to pay only the interest in case i lose my job. anyway, i have to read through your posts again to make sure i understand everything correctly. thanks again. take care.

–mike
 
I too am in the business… I am a mortgage broker.

Interest only programs are great in a small number of cases: ex: new graduate from med school with little or no money but a good prospect for income.
or
need for housing for a short time period (applies to some Fed employees who are due for transfer - like FAA executives). They have little concern for the principle payment for a couple years, and will be content with appreciation.

For most, it is a real gamble. Many programs with interest only are adjustable or based on the prime (same thing…rates will change), while some others will offer a normal 30yr fixed rate, then bump the interest for an interest-only program. Be wary.

Although I have never seen this in print or in discussion, I believe that lenders have now offered this program for their own benefit. Every payment you make requires them to find a new home (no pun) for that money. When you pay interest only, their job is easier - less money to relend. A lenders dream is to only recover profit, let the principle stay high.

If it is that good for them, is it good for you?

For my clients who do choose the interest-only programs, I provide an amortization table which encourages them to pay principle.

Additionally, many of these programs are only a HELOC - home equity loan where your first draw is the entire amount. When you pay on the principle, you have a potential for a draw years down the road without the expense of a refinance.

However… and this is not true in every case, only most… when you use a HELOC and default, you are not entitled to retain your equity. Example, buy a house for $400K, with a HELOC of $300K. A year later you default, the house is taken and resold for $390K. You get nothing. A conventional mortgage in the same senario would see you receiving any cash over the sale and bank costs.

MrS
 
There are interest only loans that have a fixed rate for a set period of time. For example, you may chose to get a 5/1 ARM with an interest only feature. Your payment and rate are fixed for five years before the loan can adjust. If this person is buying their first home, chances are that they will sell it within the first five to seven years. Not only that , but of all people who get a 30 year fixed, the national statistics show that between 70-80% refinace in the firsrt three to five years. Now if that isn’t a waste of money I don’t know what is. In regards to HELOC’s, or Home Equity Lines of Credit, yes you can use them to purchase a home as opposed to their traditional use for home improvement. They adjust whenever prime rate goes up or down. Personally, I don’t think using a HELOC is the best choice for purchase money.

Consider this, on a loan of $200,000 at a rate of 5% your fully amortized payment would be $1074 each month. The same loan amount on an interest only loan at a rate of 5.125% would have a payment of $854 each month. That is a savings of $220.00 each month. Over five years that comes to a total savings of $13,200.00. You would have paid down approx. $16,342 using a fully amortized loan. A difference of $3142. If you choose the interest only loan and then take the monthly savings and invest it somehere where you can get a return of just 8% you will turn that $13,200 into $19,395 over five years. So the reality is that after five years using an interest only loan you will have $3053 more than if you payed towards principle. In the whole big picture, that interest only loan sure looks a whole lot more attractive to me. By the way, based on the national average for increase of value at 7.5% each year, your house value will go up to $358,907 assuming an original purchase price of $250,000.
 
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michael8975:
Greetings all,
I need some ethical advice. I am currently in the market to buy a house, but discovered after speaking with a few lending institutions that the down payment I had saved up wouldn’t get me much. But both institutions seemed to indicate(off the record) that if I borrowed money from my parents and kept it in my account for two months(making it look like it was mine) and provided receipts, it would be fine. So my parents have floated me the loan and I am currently sitting on the money and waiting. I am pretty sure this is unethical and am considering giving the money back. Is there a legal and ethical way to borrow money from my mother and father? Any comments or suggestions would be greatly appreciated.

–michael
Click to expand...
PLEASE dear Michael:

Do NOT borrow money from parents. I have learned (believe me-----after many years of marriage and much trial and tribulation) that it is NOT a good idea to get parents involved in any financial situations. If they would like to give you a gift of the down payment for your home, fine, great, but a GIFT. Period. No questions asked–to get the home YOU want–not the one they want. Have them give you the money–NOT pay the lender.

Save yourself–and your wife lots of needless trauma here.
 
Hi Sparkle,
Your advice is much appreciated. Although there are already a few frustrating things about my parents being involved(a little too much advice at times), they definitely provide some insight into house shopping that I couldn’t get anywhere else. So I do agree with you that it’s better to make your own decision, but ultimately I think they will allow me to that(as I will be paying for 95% of the house). And trust me, I hate owing people money…especially family. Did you have a bad experience?

–Mike
 
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