Non Arms Length Transaction Home Loan Help
by Levi from New York
Ask Kate for non arm's length transaction home loan help: Hi Kate, My father in law has a house in upstate New York. He's selling for 70k and owes me 20k. He'll sell me the house for 50k. He said he'll sell me the house (on paper) for $100. Then I can take a $50,000 line of credit on the house and pay him that and save on mortgage fees. Or should I take a mortgage and lock in the low interest rates available today? Thanks.
Kate Answers: Non Arm's Length Transaction Home Loan Help
***zz-portrait-left.shtml*** Dear Levi,
This proposed real estate transaction between your dad and you is called a non arm's length transaction in mortgage lending.
How can a non arm's length transaction be identified?
What's a Non Arm's Length Transaction in Real Estate?
- Are both the home buyer and the seller acting in their individual best interests?
- Are both the home buyer and the seller acting independent of each other?
- Are the home buyer and the seller related to one another?
If you answered no, no, and yes, you're in a non arm's length transaction, causing some mortgage lenders to race away in panic.
Will Lenders Accept a Non Arm's Length Transaction?
Lender's hesitancy to get involved with a non arm's length transaction has been around for many years. But don't assume I'm saying it will stop you from getting a mortgage. In fact, let me tell you a story.
A single mom was turned down by one of the largest mortgage companies in the US and sent to me when I was in lending. She wanted to buy a house from her ex-boyfriend, the father of her child. He offered her a deal much like yours. In return, she would waive all claims for child support.
I am not an attorney so I did not argue the validity of their agreement. I had bigger worries about getting her a mortgage. Long story short, I helped a first time home buyer become a homeowner without a penny from her pocket.
Example of Successful Non Arm's Length Transaction
But wasn't this a non arm's length transaction? Of course! You will be interested to see how she successfully obtained her mortgage loan approval.
- They spelled out their intertwined relationship to the lender.
- She financed as a home buyer instead of refinancing as a non-seasoned homeowner.
- They priced the home on the lower end of fair market value.
- She agreed to an FHA mortgage loan although this program was not her first choice.
- He gifted the downpayment and paid mortgage closing costs from his equity.
Why do I tell you this? Because there is usually more than one way to accomplish goals.
So talk with a local bank and compare their response to a major lender. You could ask which would better serve your needs and your father's, mortgage refinancing or a purchase transaction. And don't forget to consult with a tax accountant.
Home Equity Loan Line of Credit vs 30 or 15 Year Fixed Rate Mortgage
Now let's get back to your original question about loan types. Should you finance with a traditional fixed rate mortgage or opt for a home equity loan line of credit (LOC)?
There are tradeoffs with both. Your decision will be somewhat dependent on whether or not the lender will agree to a cash-out refinance using an LOC since your ownership of the home will not be seasoned.
The line of credit is free of many customary closing costs but usually carries adjustable rates. Watch for annual and life-time caps on the interest rate, not just the payment. Read the fine print on prepayment penalty. Ask if there is a balloon payment due.
Some homeowners like being able to use the line of credit, pay it back and re-use it vs the amortization of a traditional mortgage. Yet a 30 year fixed rate mortgage remains the king of the jungle
among homeowners. However, the 15 year term is catching up in popularity.
Mortgage closing costs should be similar but interest rates for 15 year fixed will be significantly lower than its 30 year counterpart, saving you thousands over the term of the loan. See how Tucker saved money with a 15 year fixed rate mortgage
Ask Kate's Home Loan Help
Levi, additional home loan help for non arm's length transactions and mortgage financing for rural properties can be found at these Ask Kate questions and answers:
Good luck and best wishes,
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