FHA and other lower income loans or buying a house ourselves and renting or rent-to own with my child (or my child's family)

[TravelingChris]

I am trying to resolve a complicated situation.  My son and his fiancée cannot get married until mid October due to legal reasons.  Baby is due in the first part of Nov.  Fiancée is currently part owner of a house that her ex lives in.  She has those two children, Tues after school to 1pm Saturday as the current arrangement.  My son is currently making almost all the income but with her child support (7200), they currently are at approx. 41OOO. That is before earned income credit or anything else like that which I guess for their son would be 3168.   They are living in separate apartments and are looking to rent or buy a house.  Rental houses that are right for them  are around 1400, which is a lot.  We could buy a house with a much smaller mortgage payment and rent to them or rent-to own to them.  My son seems like he could qualify alone for an FHA with 3% down payment or AL has some other programs that help even more that he probably qualifies for. 

I already told them that if we are buying a second home to rent to them, we aren't buying in murder land areas, which they appreciate too. Fiancée currently does live in murder land.

I welcome any and all advice.  We (dh and I) only have experiences with VA loans since we have used that 3 times.  Should we try to get my son qualified as a first time buyer for all those programs and would that be able to be done so they could move in by mid Oct?  My son does have very good credit.  So do we.  Or would it make more sense for us to buy a property to rent to them?  Or rent to own?  I know there is some kind of IRS rule that if you are renting to relatives, you must charge reasonable rent- not something very low.  Does that mean market rate?  Or does that mean enough to pay mortgage, taxes, upkeep, etc?  Or something else?

 

I really would appreciate any advice anyone can give me.  

[WildflowerMom]

I'm curious about this, too.   We are thinking about buying a small home for ds to live in, but we're still not totally sure yet.   
I found this... https://www.sapling.com/12086999/tax-consequences-renting-family-members#:~:text=However%2C if you let relatives or friends rent,that counts as personal use of the property.

[WildflowerMom]

This is informative, also... https://www.cbsnews.com/news/when-renting-property-to-relatives-know-the-tax-rules/

[Annie G]

USDA loan programs are designed for lower income buyers. They don’t require a down payment. the rates are really good. Don’t be fooled by the ‘rural’ part of the program- tons of homes are available in towns all over. We sold our IL house to a buyer who used the program. 
 

 

[Faith-manor]

We did a FHA loan when we were young and newly married. It was fine. I will say that it was an epic amount of paperwork all along the way, and way more to sign at closing than any other mortgage we have ever had. It was slow being processed. But that was also in 1992, and I would hope that the process has improved by then.

Our home south of Huntsville was purchased with helping our adult kids out. It is rented, but much lower than market rental value to our dd and her family so they can save for their own home. They were paying a lot of rent for a small place without amenities. Our sons have a standing offer to live there and help with utilities, food, and chores/maintenance if they want to pursue jobs in Rocket City since jobs are way more plentiful there than here. So we financed the house and hold the mortgage, but anyone living in it contributes. It saves them money, and secured a house we love for future retirement as well as a place we can take the grandmothers for breaks from the hard winter here.

The single biggest thing is for every party involved to air their concerns up front and iron out an equitable agreement assuming that the adult children involved are responsible, conscientious adults. If I had either of my two nieces in our family, there is absolutely NO WAY we would buy a place foe them to live in.

[katilac]

Unless you actually want an investment property, or eventually want the house for yourself like Faith-manor, I would probably just help them with a down payment. It's going to cost you to buy and maintain the house, and making a one-time gift is simpler tax-wise and also relationship-wise. You make the gift and move on. If they decide to move in a year, that's on them and they deal with the house.  If you buy a house for the sole purpose of renting it to them, it will be a little maddening if they decide to move in a year.

The fact that you say 1400/month is a lot to pay for rental houses for a family of four means that reasonably priced houses can be found in the area - at $40k income per year, they should aim for about $935 mortgage payment. If his fiancee is part owner of her ex's house, she should be getting a payment from that (he should buy her out if he doesn't want to move).  Your son has good credit, but you don't mention hers. If her credit isn't good, or is just in a lower tier than his, they may not want her on the mortgage applicaton, particularly as she doesn't have income. 

If they are hoping for mid-October, they need to be talking to a bank today about getting prequalified for a loan and for any special programs. They can go ahead and do that now and still revert to the idea of renting from you, but it will open more options. 

[Bootsie]

Would you be taking out a mortgage to buy the home?  It is likely that you would have a higher interest rate on the house because you are renting it rather than occupying it yourself.  You would also need to carry insurance.  In addition, your son would need renter's insurance.  Those two policies are likely to add to more than one policy that would be needed for an owner-occupied home.  Unless they are not able to qualify for a mortgage, or the rate is much higher than the rate you would pay, it probably makes more sense for them to take out a mortgage, even if it means that you are gifting them some money to help out.  

[Ottakee]

4 hours ago, Annie G said:

USDA loan programs are designed for lower income buyers. They don’t require a down payment. the rates are really good. Don’t be fooled by the ‘rural’ part of the program- tons of homes are available in towns all over. We sold our IL house to a buyer who used the program. 
 

 

That is how I got my first house.  Mortgage was based on a % of our income.  We later switched to a conventional mortgage bit it was a great way to get into a house.

[Scarlett]

8 hours ago, TravelingChris said:

I am trying to resolve a complicated situation.  My son and his fiancée cannot get married until mid October due to legal reasons.  Baby is due in the first part of Nov.  Fiancée is currently part owner of a house that her ex lives in.  She has those two children, Tues after school to 1pm Saturday as the current arrangement.  My son is currently making almost all the income but with her child support (7200), they currently are at approx. 41OOO. That is before earned income credit or anything else like that which I guess for their son would be 3168.   They are living in separate apartments and are looking to rent or buy a house.  Rental houses that are right for them  are around 1400, which is a lot.  We could buy a house with a much smaller mortgage payment and rent to them or rent-to own to them.  My son seems like he could qualify alone for an FHA with 3% down payment or AL has some other programs that help even more that he probably qualifies for. 

I already told them that if we are buying a second home to rent to them, we aren't buying in murder land areas, which they appreciate too. Fiancée currently does live in murder land.

I welcome any and all advice.  We (dh and I) only have experiences with VA loans since we have used that 3 times.  Should we try to get my son qualified as a first time buyer for all those programs and would that be able to be done so they could move in by mid Oct?  My son does have very good credit.  So do we.  Or would it make more sense for us to buy a property to rent to them?  Or rent to own?  I know there is some kind of IRS rule that if you are renting to relatives, you must charge reasonable rent- not something very low.  Does that mean market rate?  Or does that mean enough to pay mortgage, taxes, upkeep, etc?  Or something else?

 

I really would appreciate any advice anyone can give me.  

https://www.rd.usda.gov/programs-services/single-family-housing-programs/single-family-housing-guaranteed-loan-program
 

On the first page there is a link to see if any house they are looking at qualifies based on the location.  

[Scarlett]

I know my SIL got such a house when she was a very low income single mom 2 kids.  A couple of years later she got married and they are still in that house.  
 

I don’t think it will matter if they get the house before or after the wedding or before or after baby arrives since their income won’t change significantly and on his own he is well under the limits.  
 

He will need to call the bank and specifically ask for this type of loan.  In my experience banks don’t love this loan and don’t typically offer it as an option.  

[Faith-manor]

11 minutes ago, Scarlett said:

I know my SIL got such a house when she was a very low income single mom 2 kids.  A couple of years later she got married and they are still in that house.  
 

I don’t think it will matter if they get the house before or after the wedding or before or after baby arrives since their income won’t change significantly and on his own he is well under the limits.  
 

He will need to call the bank and specifically ask for this type of loan.  In my experience banks don’t love this loan and don’t typically offer it as an option.  

True. Bank searching is definitely a thing, and often it is specifically mortgage companies who offer it, not your run of the mill local bank. Also, a lot of home sellers do not accept offers from FHA buyers because the process is so much longer than conventional mortgages, and it can take a long time to close. It is a negative during such a hot market to make an offer that is going to take 90 days or more to close. So that is something to consider. We saw Huntsville metro area houses listed as "conventional mortgages or cash only" selling like hot cakes when we were looking. I only saw a handful that said VA or FHA offers accepted. You will need to work with a realtor on that, and see how hard it is to purchase with that for financing.

And yes, we bought our place with a long term plan of eventually taking possession ourselves. But, if you choose to finance yourself, you could get something that needs cosmetic work if your son knows how to paint, replace carpet or linoleum, update light fixtures, etc. and then flip the house in a few years when they are in a better position financially and can buy their own. Rocket City should be an easy flip if the location/neighborhood is decent.