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Buying a House from Family

I am moving for work and luckily have a family member that has two houses and doesnt need one any more. The house is paid off so they are going to let me rent it for a while I get settled and my credit score builds a bit. They are going to let pretty much my whole payment go towards the purchase of the home. My score is curretnly 600, I have a few old collections that should fall of soon and I will get all 3 of my cards down to a $50 balance this month. My question is, should I just rent it for 6 monhts to a year or is it more wise to seek financing right away? by BDstars04 from Thiensville, Wisconsin. Dec 30th 2012 Reply


Jeremy Redlinger (JeremyR)
#29 ranked lender in Minnesota - 191 contributions

If I were you I would build my credit score up to a minimum of 640 as a 640 score will allow for a lower down payment and better financing terms that a 600 score.

Dec 30th 2012
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J.D. Peck (MortgageColoradoSprings)
#45 ranked lender in Colorado - 77 contributions

I agree with the above statement however, due to the fact that the seller is a relative this is what is considered a non-arms length transaction which may limit you on the percentage that you can finance (typically only 85% of the contract purchase price). In addition, many people make the mistake of paying their rent in cash leaving no paper trail of rental history...do not be one of these people. I would suggest making all payments in the form of check or cashiers check. Contact a local mortgage banker/broker prior to making your decision to make sure that you don't put yourself in a bad situation 6 months down the line.

Dec 30th 2012
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NA NA (NAAAAAA)
#19 ranked lender in Missouri - 18 contributions

Chances are good that if your score is currently 600 and you pay the credit cards down to a minimum balance your score will increase dramatically.As JD said below their are limitations on the Loan versus the Sales Price /Value for a non arms length transaction (ie family) An immediat family member may gift you equity in the home therefor you would end up realizing the equity they already have in the property.Renting to own is not going to count as paying on the house.Sure between you and the seller it will but in the lending world the only amount you may gain is what you are paying beyond what the appraiser says that the home would actually rent for.If I were you I would rent a couple of months make sure the job is gonna work out.Get those cards down to a $50.00 balance.If you have just one or 2 collections try to get them removed if its more then that ignore them (do not pay them) this creates new activiity which the computer thinks is a new collection therefore lowering your credit score even though you did a good thing.If and when you are ready give us a call and we will walk you through the process or help you repair your credit as a part of giving you the home loan

Dec 30th 2012
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Joe Metzler (JoeMetzler)
#1 ranked lender in Minnesota - 4,002 contributions

I suggest renting until your credit scores are over 640... www.wi-mortgagebroker.com

Dec 31st 2012
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Phil Dumouchel (PhilDu)
#32 ranked lender in South Carolina - 2,246 contributions

I agree that you may see your credti score increase by paying down the credit cards so that the balances are less than 30% of the limit one card. 640 is the minimum where you will have an easier time getting approved and better rate. While there are limitations on selling to a family member, I have not had issues with the 85% rule if the transaction is set up correctly. Also, your rent cannot be applied as downpayment funds unless your relative treats it as a "gift of equity", only the amount over the fair rental value for the property can be applied against the purchase price, but they can reduce the purchase price which does not help you with the downpayment - but they can give you a "gift" of the difference between the current value of the home and the price you pay. They may have to pay taxes on that gift and should get advice from their tax professional, perhaps the tax liability should be considered when setting the purchase price. Make sure you pay them with a personal check or can otherwise document any rent givent to them, this will be important to make sure you get credit for on-time rent and/or any deposit you give them. (Cash is difficult to document as can be a money order unless the amount can be specifically traced back to your bank account.) Good luck.

Dec 31st 2012
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Ritchie Baumann (Ritchie)
#28 ranked lender in Wisconsin - 28 contributions

Renting sounds like the best option based on what you have shared. Now is the time to make two plans to be ready. A plan to improve your credit score and a plan to handle the family transaction of real estate. It's great that some old collections may fall off soon, but you also need to make sure you don't do new things that will hurt your score. Then having a plan where you are handling rent correctly, a sales contract, equity, etc that meet the goals of both family members is important. My office is only 30 minutes from where you live. If you would like to meet in person, we can help you map out a plan.

Dec 31st 2012
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Lorne Harvey (lorneharvey)
#80 ranked lender in Washington - 431 contributions

Consider Googling...."identity of interest transactions" or "non-arms length transactions"

Dec 31st 2012
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Steven Ceceri (CreativeFinancingOptionsGroup)
#36 ranked lender in Massachusetts - 723 contributions

Please describe who the family member is (ie, Sibling, Parent, Grand Parent, Niece, Nephew, Cousin, etc). Once this is determined, I would suggest that you can start the mortgage application process now with a Trusted Mortgage Professional. This process will include having your credit report pulled and for you to gather all of your necessary supporting financial documentation to submit in advance. It is Important to Understand that your Consumer Credit Score is much different than a Mortgage Credit Score, so you really need to confirm what your Mortgage Credit Score is and work off of those numbers. A Trusted Mortgage Professional will want to build a relationship on Trust and Knowledge and should have your complete file in hand to have a clear understanding of your entire financial picture (income, assets, etc). Some collection accounts just don't "drop off" as one might think, thus it is important to monitor your credit and dispute the accounts as needed. With regards to Family Situations, you are certainly able to purchase a relatives property and there COULD BE a LTV Restriction depending on your family relationship, but certainly there are guidelines on what will allow for the Maximum Loan to Value that you can obtain with an FHA Insured Loan. I'd be happy to help you going forward! Best of Luck!

Jan 4th 2013
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