10-08-2008 10:24 AM - edited 10-08-2008 10:35 AM
In trying to make a long story short, I'm trying to buy my family home. My mother is no longer able to care for it, and it's just become to much house for her, as she recently had a decline in health. We had hoped not to be in this position for another couple years, but I would really hate to see her have to sell the house to someone else. She's willing to give us a good deal on the price but she really can't afford to just give it us.
I had some problems with my credit in the past. I've been paying everything on time for the past 6 months, and will continue too, but I only actually have one credit card currently active. I'd heard that you shouldn't take out any new credit before trying to apply for a mortgage (which we hope to do in March of next year), but at the same time I've heard that it's better to have more than one card. So I'm a little confused.
I want to do whatever will put me in the best position to be able to get approved for the mortgage. My husband's credit is good. My score only averages around 545. But that's up from the 400 something it WAS at 6 months ago. Is it worth getting a second card? Will that actually help or hurt my credit and chances at the mortgage?
The other problem is going to be my income... I work as a paralegal but in a small firm and I'm paid direct from their business account. I make about 800 a week, but have very little documentation. Sometimes it just so daunting. Being able to buy this house from my mother is so important to us. I know that we could afford it (as long as our interest rate isn't absurdly high hah) But sometimes I just feel overwhelmed. I guess I'm just looking for some direction. What is the best way to tackle this situation?? Any help is GREATLY appreciated.
10-08-2008 11:56 AM
Two ways that this could happen.
#1, is to qualify for a mortgage to purchase the home from your mother. The major items to have when purchasing are: qualifying employment, enough income to support a qualifying debt to income ratio, down payment, good enough credit, and (sometimes) reserves/assets in addition to the down payment.
If your employer can confirm you have been working there for at least 2 years, then your employment should be fine to qualify with.
For your income... do you get W-2's? 1099's? Do you get a paycheck? Are taxes withheld? Do you get paid "under the table" and do not report income on your tax returns?
How much does your mother owe on the mortgage, how much is the home's value, and how much would your mother be willing to sell it to you for?
How much in reserves/assets do you have (checking, savings, 401k, IRA, etc.)?
#2, if your mother trusts you and doesn't need to "net" anything from the sale, is you simply move into the home and start making the mortgage payments. The existing mortgage is in place and then when you are able to qualify, buy the home from your mother.
Either way, I definitely recommend you have more than 1 current trade line going - you need at least 3 and perhaps even more if you can quailfy. The "no new credit 6 months before you purchase" guideline is for people who currently do qualify but don't want to bring down their scores before they buy, whereas you are in a "rebuilding" mode with limited trade lines, where more credit will help.
10-08-2008 01:39 PM
Thank you so much for your reply! I really appreciate any input this whole process is just so overwhelming sometimes and all you hear on TV is how even people with good credit are going to have a hard time getting a mortgage. To respond to your questions,
1. My employer CAN verify that I've been working there for three years, as well as what I make, but I don't get paychecks... He just writes checks from his business account (its a very small firm... two lawyers and me.) so they don't have any payroll service or software. Taxes are not withheld from the pay that I get... and while I DO report the income on my taxes, in all honesty I don't report ALL of my income on my taxes... had I known the situation that I'd be in I certainly would have, but I didn't really anticipate it at the time.
2. My mother owns the house free and clear, there is no mortgage currently on the house. The home is valued at $300,000. She is willing to sell it us for $200,000. Idealy though we'd like to take the mortgage out for $250,000 as the house needs new siding and insulation and this is something that we wouldn't be able to afford without that extra money.
3. Our checking account is primarily used for bill pay so there is generally only ever $1,200 in there at a time. We have $10,000 in savings, and I'm not sure about 401k or IRAs.
And thank you for clarifying on the "no new credit before obtaining a mortgage" thing for me. As I said I had heard that getting a new card would actually bring my credit score down. Then I heard that only having one card would also bring my credit score down. So I really had no idea what was the better way to go there. Thanks again for all your help, its very much appreciated
10-08-2008 05:08 PM
You are welcome. Yes it can be pretty intimidating to buy a home or attempt to refinance a mortgage, so it is nice that they have these places for people to be candid with information.
Interesting situation with your employer. The good thing is that they can verify employment, however the not-so-good thing is that the lender will need to review your tax returns and will use the income from there - not the actual amounts you are getting paid. How much did you claim (after any depreciation, expenses you wrote off) on your taxes in 2006 & 2007?
However it sounds like your husband would be on the loan too. What are his credit scores like, and how much income does he have? Perhaps you wouldn't be needed on the loan to qualify, who knows, that is why I am asking these questions.
Do you have other payments on cars, credit cards, loans, etc.? If so, what are the minimum payment on each of them (break them down 1 by 1)? Utilities, cell phones, insurance, etc. aren't included in the debt to income ratio that lenders will use to qualify... although if you are doing a personal budget for yourself you'd want to include them for that purpose.
Since your mom wants $200k out of the sale, then what she can do is sell it to you for $300k (or lower if it appraises for lower), she'd give you a $100k gift of equity to use as the down payment, and you'd get a mortgage for $200k, and then you could get a remodel loan (such as FHA's 203k) to add/repair/improve to the home. Or if a remodel loan isn't something you want to deal with (because it does require lender involvement during the remodel process, or you just want to have full control of the funds), your mom could sell it for $300k with a $50k gift of equity, resulting in you getting a $250k loan amount, and then being the nice person she is, would pay for the $50k of improvements you want to do to the home.
The $10k in your savings & $1k in your checking should be fine for reserves, and you can word the purchase contract to where your mom can pay for all of your closing costs so you really wouldn't have to bring in anything at closing.
Also, another tip, is that you want to find out in your county if they are going to reassess the property taxes when you buy the home. Normally they do reassess property taxes, but when a family member is buying the home from another family member they might be able to maintain the current property tax rate, and that could save you hundreds or thousands of dollars a year.
10-08-2008 11:40 PM - edited 10-08-2008 11:42 PM
Hmm... It's not really related to you questions, but the fact that neither you nor your employer properly documents your income to the government (IRS and whatever your state income tax agency is), sets both you and them up for some potentially severe fines and/or jail time. Remember, when the Feds finally got Al Capone, it was for tax crimes, not his mob activities. If I were you, I would sit down and have a candid discussion with your employer about this. Given that they're lawyers, I'm a bit shocked that they're taking such a legal risk. They could lose their licenses if busted. I can only assume that it's out of ignorance/oversight and that they have no nefarious intent. If your talk with them leads you to believe otherwise, I would suggest you seek alternate employment before they bring you down with them. On the other hand, it's possible that I'm the ignorant one, and what they're doing is perfectly legal for them (though your under-reporting of your own income does put you at some legal risk). If I were you, though, I'd want some reassurance from them on the matter.
[edited to fix typos]
10-09-2008 04:28 AM - edited 10-09-2008 04:29 AM
1. It is kind of an "interesting" situation with my employer. On my tax returns it comes off looking much like anybody who is paid a tax free salary (like commission or tips.) I do claim MOST of my income. Or at least my base pay of around 32k a year. I don't really claim over time, or bonsus on settlements, etc. etc. Those things bring my typical annual income up to about 45k.
2. I currently don't really have many other monthly payments, I paid my car off in 2004, and I have on Chase credit card (a soul eating debt like no other that has about 15k on it - who ever thought giving credit cards to 18 year olds is on my list hehe). I do intend to pay that card off in its entirety after getting the mortgage. It should be paid down to about 10k by then. I hope. I have broken down what all of our expenses would be month by month about a trillion times to make sure that we would be able to afford everything. And as long as we can get a loan, we would be able to.
3. "your mom could sell it for $300k with a $50k gift of equity, resulting in you getting a $250k loan amount, and then being the nice person she is, would pay for the $50k of improvements you want to do to the home." --- This is actually what we plan to do
4. My husbands credit scores aren't GREAT either, but they're certainly better than mine and we're working on bringing his up too. Currently he's at 648, 660, and 682. He makes about 50k annually.
I just hope there are things that we can do to be able to get this mortgage by next March - April. It seems like some people can get their credit scores up right away and other it's takes a couple years.
10-11-2008 04:24 PM
In general, most lenders will only accept income on which you pay taxes. You should not base decisions about tax matters on what people say in an Internet discussion board like this one, you should seek qualified professional advice, but especially in the current market it is extremely unwise to play fast and loose games with taxes and loan applications. Most lenders have traditionally required applicants to sign a form authorizing them to pull records from the IRS, but until recently they only spot-checked a small percentage of borrowers. Now they probably check everybody, and I have read that some lenders are starting to go beyond pulling data FROM the IRS, some of them are sending data from the applications TO the IRS, which can trigger an IRS audit.
Basically, you cannot have it two ways, reporting one income to the IRS and another to the lender. Some people have even had to file amended tax returns -- and pay the difference plus interest on the increased taxable income -- in order to qualify for a loan.
10-12-2008 03:40 PM
If your mother owns the house outright, perhaps she can be your mortgage holder. She sells the house to you, you agree on an interest rate and have a legal contract drawn up., and you make your mortgage payments to her. That way you would not have to qualify for anything and she gets monthly income from you.