Q: I’m getting married this summer. Both my fiancé and I are in college so we don’t have a lot of money to buy a house, but we’re really concerned with how quickly homes are going up in price and we are really afraid we’re going to get priced out. My parents are willing to buy the house for us, as long as we make the payments, which I’m sure we can handle with the help of student loans and such. But my parents are concerned that if we wind up being unable to make the payments, a foreclosure would go on their credit record. Also, the deal is we would put the house in our names after we finish school and start working. What type of documents do we need to have drawn up so that, if worse comes to worse, my parents’ credit is protected and we will be able to transfer ownership when the time comes?
A: Let me handle the second question first.
If your parents weren’t getting a loan on the property, there are several different ways in which you could set up a transfer of the property at a future date. But with a mortgage on the property, no matter what your arrangement with your parents, the bank won’t let you just take ownership without the bank’s permission because the loan was granted based upon your parents’ ability to make payments, not yours.
When you go to take title, you will either have to qualify to assume your parents’ loan, or get your own loan and pay off the other one.
With that understood, the easiest way to guarantee you can purchase the property is to enter into an option agreement with your parents.
An option is simply a contract that gives you the exclusive right to buy the property, usually for a set price, within a certain amount of time. For all practical purposes, your parents would be unable to sell the property until the option period expires.
Although trusting your parents to follow through with the sale may not be an issue, should your parents pass away, the executor of their estate may not be so willing to transfer the property if the option price is below market value at the time.
I suggest you execute an option agreement and record the agreement with the county Recorder’s Office.
As far as protecting your parents’ credit in the event you can’t make the payments, there’s not much I can offer to help put your parents’ minds at ease.
Just like anybody who buys a house, they are at risk for a foreclosure should the circumstance present itself.
Should you not make the payments, your parents can step in and make them. If they either can’t or won’t keep the payments current, they can sell the house long before a foreclosure takes place. Normally, a seller who lets a house go into foreclosure when there is an active option agreement in place is violating that agreement and subjecting themselves to a breach of contract lawsuit. For that reason, I would carve out an exception to the option agreement allowing your parents to sell the house should you no longer be able to make the loan payments.
If I were your parent, I would have you make your payment directly to me. I would make the monthly payment to the bank so I know it was made on time.
It’s actually quite common for parents to purchase a home for a son or daughter. But the law considers the owner, your parents, to be a landlord and you to be a tenant. Just like any landlord, the bank will hold your parents responsible for the mortgage payment. A well-written option agreement will protect both your interests and the intentions of your parents.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column, you can send an email to [email protected].