New college graduate daughter is moving to another town so that fiance can return to college. She will get job, get married, put him through school, etc. Typical hard-working starter couple. But lenders have rejected them for a loan in the new town, since they don’t yet have jobs there. Now they’ve decided that daughter moves first, gets job, and then he follows later. So that one person is working and can support their new little family no matter what.
But they want to buy a house. So we’re thinking of lending the $85,000 purchase price out of an IRA, at 4.5%, 20 years amortization. The payments of principal and interest will just go back into the IRA. So no tax liability should come due until one day that IRA is tapped.
Has anybody here done this? How do you set it up? We figure that the current IRA will transfer the 85K to a newly-named additional IRA at the bank. Then the bank cuts check to title/escrow company for the purchase. Monthly payments would then be made into that new IRA account. The daughter is not a beneficiary on the account, so that should be arms-length enough.
Has anybody here helped their kids buy a house this way? Any warnings?
Thanks BLL. I called our bank and they said the same thing. There must be a custodian who can file with the IRS. So now I’m looking into finding a custodian; the bank does not do custodial IRA accounts.
The whole scenario is very interesting. The idea that this new IRA account could earn more interest, and our daughter yet pay less interest than a mortgage loan. Plus that it would make the transaction doable.
No custodian will allow this transaction because your IRA cannot loan money to your daughter or her husband. Both are disqualified individuals.
You could do it in the BF’s name now and file a lien against the property to protect your interest. I don’t know how the IRS would view the transaction once they are married, but I do know they allow an IRA to invest in a new LLC where the IRA will be a member, but it will not allow the IRA to contribute any more capital after the initial contribution. The BF is not disqualified until they are legally married and your IRA can conduct business with him up until that point. I don’t see a real difference between your situation and that of the LLC.
My fear here is that the IRS knows you would never loan him money unless he was marrying your daughter and they could view it as a prohibited transaction because your real intent is to help your daughter, who is a disqualified individual. The BF is just along for the ride.
Yes, BLL, we just got the same answer from a tax attorney. The IRA can not lend to a lineal descendant, and the IRS would probably view the fiance with a prejudiced eye.
It sure looked like a great idea for a while!
Now we are going to dip into a line of credit and the bank will give a short term bridge-type loan until our daughter gets a new job and can re-finance on her own with her new husband. It really helps to have fostered that special relationship with this small local bank.
Be careful not to get into too short a term on your bridge loan. There are many pitfalls when a buyer is buying a property from a parent. It can become a non-arms length transaction very quickly. Once that happens your LTV will be limited. Make sure your daughter pays you with checks NOT money orders. Keep copies of all the cancelled checks so that it can be proven that your daughter has been making REAL payments and not just living in the house rent free until she can afford it. Your right it is good to have options but make sure you have all your ducks in a row before you jump in and purchase a property that you could be stuck with.
Thanks, Christopher, for the warning. Our daughter is now trying for an 18-month loan with our local bank. She alone would be on title, so she would qualify for the first-time buyer $8,000 stimulus money. We would be guarantors on the loan.
The property is only $85,000 so payments would be equivalent to rent. They should be able to refinance when they both have new jobs in the new location. The house is a foreclosure, and it is undermarket maybe $20,000. Our daughter and her future husband will be making the payments. I appreciate your warning about an arms-length transaction.
You could also look at doing an FHA kiddie condo loan. I just did one for one of my customers. The daughter is a student with no income but good credit. The parents co-signed on the FHA loan and we only used their income to qualify. They closed last month. A lot of parents use this type of loan when their kids go away to school. The parents buy the house which lowers the housing expense and is usually off-set by rental income from roommates. If the 18 month loan won’t fly you may look into this type of FHA loan. Hope this helps.
christopher w,
Thanks for the tip, but we won’t qualify. We have too many mortgage loans, so no FHA. How many loans is the maximum now, anyway?
Our 2nd local bank called this morning–they will lend 80% at 6% interest, amortized over 30 with a balloon in 7 years! Terrific financing! We will not be on title, but will sign as guarantors on the loan. The newly weds will be able to get the $8,000 first-time buyer tax credit.
They won’t have to go to a rental, which would be difficult as fiance is a cowboy by profession and has 3 horses, 5 cowdogs, lots of saddles and gear.
This is the first loan I’ve heard of as “guarantors”, not co-signers. Very interesting.
Just a quick suggestion. Set up a self-directed IRA or other retirement account funded by your current account. Invest the funds in a c corp which buys the property.
Godsguy
I like things simple. It’s too easy to get audited (which ties up hours and days of time and attorney fees) even if things are kept simple. So I can’t imagine doing something complicated on this smallish transaction. Thanks for the tip anyways.