Vacation Property - Gifted Half Ownership, Buying Other Half

[valley_man0505]

I have an opportunity coming up to obtain sole ownership of a vacation property that has been in our family for over 70 years.  Currently, my parents own half and another relative owns the other half.  The relative that owns the other half wants to sell out and my parents no longer have interest in the place as it is too much upkeep at their age.  So, my parents have offered to transer their half-ownership to me and the other owner has agreed to sell his half to me...IF I can obtain a mortgage to cover the sale.  This is all expected to happen in late-Spring/early-Summer.  I have a couple of questions:

• Does anyone have any idea what would be expected for a down payment considering I am essentially getting a $320,000 property for $160,000?
• Can the entire transaction happen at once?  In other words, can my parents pass their ownership on to me as part of the same transaction where I purchase the other half from the other relative?
• Woud it be best to have my parents pass their ownership to me ahead of applying for a mortgate to buy out the other half?  Would this improve my odds of getting approved for the mortgage since I already have part ownership of the property?

For some additional background, my credit scores are in the mid-to-upper 600s.  I have some small medical collections that are dragging my score down a little and I"m in the process of working to get those paid off and/or removed.  I am hoping to be in the 700s by the time I would apply for the mortgage.  Also, I do already have a mortgate for my primary residence.  I do have at least some equity there, depending on what the value would actually be if I had it appraised now.  I am estimating it be worth around $200,000 in today's market while I have a remaining principal of $120,000.

[dragontears]

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@valley_man0505 wrote:

I have an opportunity coming up to obtain sole ownership of a vacation property that has been in our family for over 70 years.  Currently, my parents own half and another relative owns the other half.  The relative that owns the other half wants to sell out and my parents no longer have interest in the place as it is too much upkeep at their age.  So, my parents have offered to transer their half-ownership to me and the other owner has agreed to sell his half to me...IF I can obtain a mortgage to cover the sale.  This is all expected to happen in late-Spring/early-Summer.  I have a couple of questions:

• Does anyone have any idea what would be expected for a down payment considering I am essentially getting a $320,000 property for $160,000?
• Can the entire transaction happen at once?  In other words, can my parents pass their ownership on to me as part of the same transaction where I purchase the other half from the other relative?
• Woud it be best to have my parents pass their ownership to me ahead of applying for a mortgate to buy out the other half?  Would this improve my odds of getting approved for the mortgage since I already have part ownership of the property?

For some additional background, my credit scores are in the mid-to-upper 600s.  I have some small medical collections that are dragging my score down a little and I"m in the process of working to get those paid off and/or removed.  I am hoping to be in the 700s by the time I would apply for the mortgage.  Also, I do already have a mortgate for my primary residence.  I do have at least some equity there, depending on what the value would actually be if I had it appraised now.  I am estimating it be worth around $200,000 in today's market while I have a remaining principal of $120,000.

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The phrase you need to use when talking to lenders is "gift of equity" (should have a tax professional see if that large of a gift has tax consequences).

You should be able to do the entire process with one closing. 

Depending on the state you are in you may need to pay closing costs twice if you have your parents transfer then obtain a mortgage to buy out the relative.

Assuming your DTI can afford the vacation house it should be an easy process. 

[valley_man0505]

Thanks, @dragontears  .  That is helpful.  You mentioned DTI, and that is also another concern.  I will likely be cutting it close on DTI and that is part of why I was wondering about downpayment estimates.  I am curious if I should focus more on paying down balances to reduce DTI over the next 5-6 months or focus more on saving up for downpayment.

Btw, my wife (who has very similar credit to mine) currently does not work and hasn't since we had kids over 10 years ago.  She is currently looking for something at least part time to help contribute towards our income, primarily for the vacation property (we don't currently need the extra income, so there has been no rush for her to return to work).  We will likely need her to have an income to make sure our DTI is favorable.  Once we get the property, we have an established base of renters such that rental income will be enough to cover montly mortgage payments for the year (the place is mostly rented Mon-Fri in summer months, leaving weekends and select weeks for our own enjoyment), but I don't think there is a way to have that factored into DTI for the approval process.

[dragontears]

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@valley_man0505 wrote:

Thanks, @dragontears  .  That is helpful.  You mentioned DTI, and that is also another concern.  I will likely be cutting it close on DTI and that is part of why I was wondering about downpayment estimates.  I am curious if I should focus more on paying down balances to reduce DTI over the next 5-6 months or focus more on saving up for downpayment.

Btw, my wife (who has very similar credit to mine) currently does not work and hasn't since we had kids over 10 years ago.  She is currently looking for something at least part time to help contribute towards our income, primarily for the vacation property (we don't currently need the extra income, so there has been no rush for her to return to work).  We will likely need her to have an income to make sure our DTI is favorable.  Once we get the property, we have an established base of renters such that rental income will be enough to cover montly mortgage payments for the year (the place is mostly rented Mon-Fri in summer months, leaving weekends and select weeks for our own enjoyment), but I don't think there is a way to have that factored into DTI for the approval process.

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Find a lender (now) that will use the gift of equity as the downpayment (should be relatively easy) and focus on paying off current debts to bring down DTI for the next few months. 

[VALoanMaster]

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@valley_man0505 wrote:

Thanks, @dragontears  .  That is helpful.  You mentioned DTI, and that is also another concern.  I will likely be cutting it close on DTI and that is part of why I was wondering about downpayment estimates.  I am curious if I should focus more on paying down balances to reduce DTI over the next 5-6 months or focus more on saving up for downpayment.

Btw, my wife (who has very similar credit to mine) currently does not work and hasn't since we had kids over 10 years ago.  She is currently looking for something at least part time to help contribute towards our income, primarily for the vacation property (we don't currently need the extra income, so there has been no rush for her to return to work).  We will likely need her to have an income to make sure our DTI is favorable.  Once we get the property, we have an established base of renters such that rental income will be enough to cover montly mortgage payments for the year (the place is mostly rented Mon-Fri in summer months, leaving weekends and select weeks for our own enjoyment), but I don't think there is a way to have that factored into DTI for the approval process.

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Unfortunately this does not qualify as a 2nd home. You stated you have an established base of renters and that the place is mostly rented Mon-Fri in the summer. That makes this an investment property which means you cannot use a gift of equity for your down payment.

[valley_man0505]

Is there a certain threshold on when it becomes a second home vs investment property?  In the last couple years, we have been turning away renters because my parents have no longer wanted to deal with the work involved.  In the past 3 years, there have only been 2-3 weeks in the summer where they have accepted renters and those are only close friends or family.  The waiting list is long enough to fill the whole summer with people who used to rent in the past before we cut down, but, even then, it would be a max of 9-10 weeks per year, with "weeks" meaning Mon-Fri.  In other words, if we chose to "fill" the rental season, we would have renters for 45-50 days out of the year, max.

[Revelate]

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@valley_man0505 wrote:

Is there a certain threshold on when it becomes a second home vs investment property?  In the last couple years, we have been turning away renters because my parents have no longer wanted to deal with the work involved.  In the past 3 years, there have only been 2-3 weeks in the summer where they have accepted renters and those are only close friends or family.  The waiting list is long enough to fill the whole summer with people who used to rent in the past before we cut down, but, even then, it would be a max of 9-10 weeks per year, with "weeks" meaning Mon-Fri.  In other words, if we chose to "fill" the rental season, we would have renters for 45-50 days out of the year, max.

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Why didn't you just go the property management route anyway?

(edit to remove inaccurate definition)

[ShanetheMortgageMan]

It sounds possible this could be considered a 2nd home.  Fannie Mae defines a second home as the below, so even if there is rental income generated from it, it can still be considered a 2nd home if all other requirements are met.

[ShanetheMortgageMan]

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@valley_man0505 wrote:

Thanks, @dragontears  .  That is helpful.  You mentioned DTI, and that is also another concern.  I will likely be cutting it close on DTI and that is part of why I was wondering about downpayment estimates.  I am curious if I should focus more on paying down balances to reduce DTI over the next 5-6 months or focus more on saving up for downpayment.

Btw, my wife (who has very similar credit to mine) currently does not work and hasn't since we had kids over 10 years ago.  She is currently looking for something at least part time to help contribute towards our income, primarily for the vacation property (we don't currently need the extra income, so there has been no rush for her to return to work).  We will likely need her to have an income to make sure our DTI is favorable.  Once we get the property, we have an established base of renters such that rental income will be enough to cover montly mortgage payments for the year (the place is mostly rented Mon-Fri in summer months, leaving weekends and select weeks for our own enjoyment), but I don't think there is a way to have that factored into DTI for the approval process.

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The gift of equity should solve all down payment & funds to close requirements, if everyone agrees on it.  Using your figures of a $320k value and needing $160k to buy out the relative, they could sell the property to you for $206,250, give you a $41,250 gift of equity, a $5k closing cost credit, and you'd get a new loan amount for $160k.  The $41,250 gift of equity covers 20% down (so you can avoid PMI) and the $5k closing cost credit may cover the full amount of closing costs.  The relative would then get their $160k after closing.

Being that your wife hasn't worked for a long time, in order for her to use employment income to qualify she'll need a full time job + be able to document a previous employment history of 2 years (doesn't matter if it was 10+ years ago).  Part time employment won't work, as to use part time employment typically you need to have 2 years working part time.