Underwater Mortgage: How Can I Buy Mom's Home

by Carrie from Navarre, Florida

Ask Kate if it's possible to buy your relative's home that has underwater mortgage financing: Carrie's mom owned her home free and clear (without financing). To help Carrie and her husband buy a home, Mom mortgaged her own home. Now the kids would like to pay back Mom by buying her home.



The problem is... due to fallen real estate prices, Mom's home is underwater, financed for more than its appraised value.

How Can I Buy Mom's Home that has an Underwater Mortgage

By Carrie from Navarre, Florida
Underwater Mortgage: How Can I Buy Mom's Home

Hello. Here is the deal.

In 2006, my mom mortgaged the home that she paid cash for to purchase a home for my husband and myself. We in turn paid her mortgage, basically like renting the home that she purchased.

This worked out well until the last half of 2013 when we were forced to move in with her and rent out our house to pay her mortgage.

I have now returned to school in order to have a steadier career and my husband's cash flow is significantly more stable. We would now like to purchase the home from my mom with some sort of low income loan as we have 2 young children and our income is on the low side.

The problem is the home we would like to purchase will not appraise at what is owed on my mom's mortgage. Do you have any suggestions?

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: How Can I Get Financing to Buy Mom's Home with an Underwater Mortgage

Hi Carrie,

You are a bit backed into a corner so let's think outside the box for potential solutions.

I'm going to assume that you do not have sufficient cash to compensate for the insufficiency caused by the underwater appraised value.

Before we proceed and because the current situation is a little complicated, let's summarize.

  • To help you buy a house, your mom financed her free and clear home.

  • You are paying Mom's monthly mortgage obligation.

  • But now you've had to rent your home and move in with your mom.

  • So you'd like to buy your mom's home and finance it with a low income program to get a more affordable monthly house payment.

  • However, Mom's appraised value has fallen and her mortgage is underwater.

USDA Rural Home Loans and FHA Mortgage Financing

Excellent mortgage programs for first time buyers are the USDA Rural Home Loans and FHA Mortgage Financing. Programs such as these offer more forgiving underwriting guidelines, low mortgage rates, and reasonable lender fees.

But in the case of an underwater home, required appraisals are the fly in the ointment. I say this because underwater homes require a short sale unless the home buyer or the seller is willing to make up the difference in cash. (More on short sales in a moment.)
As a sidebar, also keep in mind, subsidized low income mortgage program guidelines often exclude borrowers who own residential rental property. Put this question on your list to discuss with lenders as you shop for loans.

Peruse this list for Questions to Ask Your Loan Originator: The Easy Path to Low Mortgage Payments.

Short Sale, Loan Modification, HARP Refinance

Moving on, if the lender on your mom's financing would approve a short sale, that would be a no-brainer solution. But because your mom is selling to a family member, I doubt her bank would authorize a short sale.

Of course you could always ask for the lender to consider a short sale between family members. Before you do, brush up on this short sale information as requested by KC from Central Valley, CA.

Going in an opposite direction, what if your mom applies for a HARP refinance (mainly to get a lower mortgage rate) or a loan modification (mainly to lower the house payments)? Of course, this wouldn't put the title to the home or the mortgage in your name. But it might make the payment more affordable and that is half the battle.

Read about HARP 2 refinancing, HAMP Tier 2 modifications, and in-house loan modifications here. Loan modifications (both in-house and Making Home Affordable's HAMP) can only be done through your own particular loan servicer/lender. But for HARP refinancing, you are free to choose any participating lender.

By the way, neither the HARP program nor modifications require equity in the home. In other words, being underwater is the norm!

Assuming the Current Mortgage aka Loan Assumption

With all of the Making Home Affordable products available to distressed and struggling homeowners, it is easy to forget about loan assumptions. A mortgage assumption is not a new loan. For very little cost, the remaining years of the loan term and the existing terms stay the same.

The homeowner (your mom) is taken off the mortgage and replaced with a new borrower (your husband and you). Following the assumption, homeowners should also make sure their names come off the title

But not all mortgages are assumable. If your mom's financing does not include assumption terms, you could approach the bank to see if they'd make an exception to the rule.

Cash-Out Refinance for Homes with Equity

Here's another idea. What if you applied for a cash-out refinance on your rental property since it has 100% equity? In turn, you could use the cash to pay off your mom's financing.

It's a thought worth exploring. Go here to learn more about refinancing for cash: Refinancing: Avoid These Cash Out Woes.

Gift of Equity and Non-Length's Home Buying Between Family Members

If you decide to hold off on buying your mom's home and discover that real estate values in your area are increasing, you could try a gift of equity from your mom to you for the down payment. I describe how this works at Non-Arms-Length Transaction Home Buying Help.

Best wishes,

Ask Kate

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