Buying Pre-Foreclosure Fixer Upper Houses

by Jean

Ask Kate about buying pre-foreclosure fixer upper houses: Jean's home is in pre-foreclosure and her daughter wants to buy it. But will this non-arm's length transaction get loan approval? Additionally, Jean asks which is best in her daughter's situation, the 30-year or 40-year FHA fixed rate mortgage.


Ask Kate: Can My Daughter Buy and Finance My Home in Pre-Foreclosure

By Jean
Buying Pre-Foreclosure Fixer Upper Houses

Kate,

My home is in pre-foreclosure. My daughter is going to purchase the home from me.

I do not live in the home but she does. The home is in my maiden name and I have remarried and live out of state.

She has received mortgage pre-approval. But I wonder if there will there be a problem with the bank providing the loan once the paperwork is done, since her last name is the same as mine.

Additionally, which is the best loan for her? The FHA 30 year fixed or the FHA 40 year fixed? She would need money to fix up the house.

So what is your opinion, which I do value!
Ask Kate at Get-Your-Best-Mortgage-Rate.com
Kate's Answer: Can My Daughter Buy and Finance My Home in Pre-Foreclosure

Hi Jean,

So nice to hear from you.

Thank you for two top-notch questions!

Do Lenders Allow Family Members to Buy Pre-Foreclosure Homes

Your daughter has been pre-approved for mortgage financing! Wonderful! But will her lender come unglued when it hears the pre-foreclosure home she plans to buy belongs to her mother?

Yes, this could happen. But why, you're probably asking!

When family members enter into agreements to purchase homes from each other, lenders often feel they are not privy to the entire story. Because of the trust between relatives, crucial elements to real estate transactions can easily be left out.

For example, are non-real-estate items such as furniture and appliances included in the sales price and being financed in the mortgage? But a more pressing concern is that the buyer is paying the seller too much or not enough for the home.

Another way to say this is that the sales price is not fair market value. Usually in these cases, the buyer or seller is being compensated without the lender's knowledge.

Examples of Successful Non-Arm's Length Transactions

Here's another great example and coincidentally, this was a mortgage I originated! My customer, a new mother and first time home buyer, wanted to trade future child support for her ex-boyfriend's equity and buy his home with no down-payment.

By the way, everyone initially told me it couldn't be done. But the FHA loan was approved and the secret was full disclosure to the lender. Read about it here: Non-Arm's Length Transaction Home Loan Help.
Non-Arm's Length Transaction: When home buyer and seller share a close financial or personal relationship. You can also read Mary Anne's success (in the comment section) after following my suggestion regarding full disclosure at Refinancing Non-Arm's-Length and Non-Seasoned Home Purchase.
Now, there are no guarantees that a lender will issue loan approval to your daughter under the circumstances. But if I were party to the transaction, I'd make sure the underwriters understood the mother-daughter relationship upfront versus discovering it on their own and feeling distrustful.

Which Is Best: 30-Year vs 40-Year FHA Fixed Rate Mortgage

When comparing loan terms such as 30 to 40 years, here's the operative word: Affordability!

But there are other considerations too. (Keep in mind, these are generalizations.) The shorter the loan term, the lower the interest rate. But the longer the term, the lower the mortgage payment.

So, if the goal is to get the most affordable monthly payment, the 40 year term usually works best to free up cash which can be applied to home improvement projects. However, this monthly affordability comes at a price over the long term.

Let's compare borrowing $200,000 at 4 percent for 30 years to borrowing the same amount at 4.25 percent for 40 years. After 30 years, you'd pay about $144,000 in interest. But with the 40 year term, you'd pay more than $216,000 in interest, flip side being that your mortgage payment was almost $90 less a month.

Can't decide which is best? Good news! I have a way that you can come pretty close to having your cake and eating it too! Go to Best Fixed Rate Mortgage Tips: Combo Loans for Lowest Payments and Peace of Mind!

Best wishes to you and your daughter,

Ask Kate

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Comments for Buying Pre-Foreclosure Fixer Upper Houses.

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HAFA and Non-Arm's Length Short Sale
by: Jean

Kate, Thank you for letting me know that doing the HAFA with non arms could possibly be construed as fraud.

My family attorney also advised me not to not do it also.

Thank you, Thank you, Jean

Hi Jean, Kate here.

I think you were smart to consult an attorney regarding the short sale.

Please let me know what your daughter and you are able to work out.

Best of luck. Kate

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