Buying house from my parents (Question for Mortgage Brokers)

[Dan C.]

I am in the process of buying a house from my parents (current rental). The place needs a ton of work and am considering using a 203K loan, or standard FHA with my own funds to rehab it. Question for the brokers out there (Jillayne?)

1. Will there be an identity of interest problem (no more than 85% LTV), if it is held by an LLC with my parents as officers?
2. Will I be able to claim the first time homebuyer credit if it is held by an LLC? (Per FHA, it cannot be claimed if one is purchasing from parents)

Thanks in advance!

[jillayne]

Hi Dan C.

I'm not a mortgage broker; I'm their teacher.

203K (or 203B) means FHA which means owner occupied ONLY.
which means you're in title as you and no other entity, no transfering the ownership into an entity. FHA loans are for natural persons only.

Most LLCs are formed to attempt to limit liability. FHA wants you personally liable to repay the mortgage.

Your parents can be non-occupant co-borrowers but they can't take the place of you being able to qualify to repay the loan on your own, your credit, your job stability etc. You still need all 4Cs to be an FHA approvable borrower: Character, Capacity, Capacity, Collateral.
(aka credit, income, cash to close, appraised value)

All three names will be on title, all three will sign the deed of trust and all three people will be liable to repay the loan.

Your questions revolving LLCs make me think you're not buying the home to occupy because most LLC folks are investor types. Not to stereotype you but remember, all FHA programs are owner occupied....with some very small exceptions such as if you are buying a HUD Repo.

I am not an expert on taxation questions. that answer will have to come from someone else.

[Dan C.]

Sorry, I mispoke. My parents keep the rental in an LLC they use to manage their properties. I am buying the house as my primary residence using FHA financing. They are not going to be on the purchase at all. I am just trying to figure out if I can do the transaction based upon the FHA guidelines and also claim the tax credit.

[Julie Lyda]

Dan,

To qualify for the homebuyer tax credit it cannot be a purchase from a relative.

Q. Who cannot take the credit?

A. If any of the following describe you, you cannot take the credit, even if you buy a new home:

Your income exceeds the phase-out range.

You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.

You do not use the home as your principal residence.

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