Legal Question in Real Estate Law in California

Re: Purhasing home for Parents

I assume you mean a three-party deal where the parties are (1) your parents, who will be the legal owners of the property; (2) yourself, the person who will make the payments on a loan; and (3) a lender to which you will make payments but which will accept the house as collateral.

There is absolutely no legal reason why this can't be done. However, it is unusual, and may not be an acceptable arrangement to most institutional lenders who like cookie-cutter deals. The more standard a deal is and the less they have to think about and worry about, the cheaper and easier it is for them to do the deal. Also, most loan originators sell them off in a secondary market in packages of a dozen or more loans, and thay all have to be plain vanilla to be remarketable that way.

The problem is that all the standard documentation - printed forms, the stuff in lenders' and title companies' word processors - all assumes that the borrower, i.e. the person whose credit rating is checked and who will be making the payments, is also the same as the owner, i.e., the person who has the legal power to pledge the property as collateral.

There are ways to work around this by finding the right lender or by structuring the deal differently.

Be sure to speak with an estate planning attorney or well-qualified tax advisor. If you are likely to inherit this house someday, then sell it, the tax basis step-up from inheritance will be very helpful to you. Also, if you are obligated on the loan, and the payments are not gifts to your parents, they are probably tax deductible by you. The tax aspects are major in your proposed transaction, and it looks like you're doing it in a favorable way, but paying for specialized advice is strongly recommended.

Re: Purhasing home for Parents

The lender would tend to want the person who executes the note and the deed of trust to have title to the property that has been hypothecated.

Most people tend to borrow the money, purchase the house and then convey it to the people they want. The problem with this is that most deeds of trust contain a due on sale clause. The conveyance to a third person, like your parents, can trigger this clause, and the lender can call the entire loan due and foreclose on the property.

Very truly yours,

Re: Purhasing home for Parents

Absolutely, but there may be gift tax consequences and there may be better ways to structure it