Q: I have a question on behalf of my brother-in-law. His mother and step-father have asked him to purchase a home for them in his name since they do not qualify.
 

My brother-in-law has a good credit score and credit history. The reason he hasn’t purchased a home himself is because he is in the military. He is constantly being transferred from base to base, if not to Iraq.

I advised him to purchase a home for himself and rent it out as an investment since he does have the resources. His mother and step-father are looking to purchase a home for almost $500,000 dollars. They claim they will transfer the property to their name within two years, and get a mortgage at that time.

I want to know if it is possible for them to qualify to take over a mortgage of that amount in two years time since they are not even close to qualifying right now. Also what would be the advantages and/or disadvantages for my brother-in-law if he purchased a home entirely under his name but then let someone else use it.

A: It takes more than good credit to purchase a $500,000 house. You also need to show that you can afford to make the payments on this property.

If your brother-in-law has good credit, is prepared to put down a substantial amount of cash on the property and has the income to qualify for the loan, he may be able to buy the home for his mother and step-father. It’s a very different question, whether his mother and step-father will develop the credit and income to qualify for the home if they can’t qualify now.

A conventional lender would allow him to borrow 3 or maybe 4 times his gross annual income, and that's with a 20 percent down payment. He would need $100,000 in cash, and then be able to afford a monthly mortgage payment of $2,528 on a 30-year fixed rate loan. If he did an interest-only loan, he'd pay around $2,100 per month.

That's fairly hefty mortgage for anyone to shoulder. Of course, if he has saved $200,000 or more in cash, it changes the equation.

Assuming he can afford to buy a home at this price point, let’s talk about the advantages (of which there are few) and disadvantages (of which there are many) of this kind of arrangement.

As far as I can see, the only advantage is the emotional quotient of the transaction. He may feel its worth a lot to help them out in this situation.

As for disadvantages, your brother-in-law is putting his credit and cash on the line for his parents. I assume they’ll make the mortgage, taxes, and insurance payments each month, plus do the required maintenance and upkeep of the property.

If not, your brother-in-law could find his good credit wiped out. That would prevent him from buying his own property when he is ready. His credit will be tied up with this $500,000 home for a long time to come. Leaving aside the issue of being compensated for his investment and trouble, it’s important that he make sure he’s not hurt in doing his relatives this big favor.

What else could he do? I think your advice is sound: If his in-laws are looking for a place to live, your brother-in-law should purchase something he can afford particularly if the home his mom and step-father want may be beyond his reach and rent it to them. If, in time, they're able to make the payments, they can purchase the house from him down the road with a conventional mortgage.

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