Selling home to a son just starting out


November 06, 2005

My wife and I pur- chased a second home in April specifically for the purpose of letting my son, daughter-in-law and our grandchild live in this home until they can afford a mortgage. They are in the process of applying for the mortgage. Since they don't have much money, I hate to see them pay high Maryland settlement costs and obtain a mortgage with today's higher interest rates.

What options do we have? I don't want, nor can my wife and I afford, to outright give this home to my son. Can we have him pay us "rent" until the home is paid off and then at that time, just add him and my daughter-in-law to the title of the home?

Interest rates for long-term home mortgages have risen in the past few months, but the rates are still very reasonable. If your son and his wife can obtain a mortgage and purchase the home from you now, that option makes sense, especially over the long run. They will own the home and will gain from future appreciation in its value.

Nevertheless, other options are available which would allow you to keep your existing mortgage in place:

Rent with option to buy. Your son and daughter-in-law could rent the home from you at a monthly rent sufficient to cover your mortgage payment, including real estate taxes and insurance. The lease may include an option, giving them the right to purchase the property at a set price at or before the end of the lease. You will have to pay income taxes on the rent, net of deductible expenses. Your son and daughter-in-law will not be able to deduct mortgage interest or real estate taxes on their income tax return.

Land installment contract. You can sell the home to your son and daughter-in-law by a land installment contract. They will pay you a monthly sum that includes real estate taxes and insurance as well as interest you may charge on the purchase price. Excess payments would be applied against the price of the home. You will continue to make the mortgage payments to your lender. At a future date, when your son and daughter-in-law can get a mortgage, they can pay you the balance of the purchase price. Upon payment in full, you will give them a deed to the property.

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