Q & A with Dottie Herman

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Q1 - I currently have no mortgage left on my current residence. My parents currently rent an apartment and they want to purchase it. How can I use the collateral in my home to help them purchase? I don't have much extra cash to give them- can I use any of my equity?
 
A - A gift of equity is common and acceptable between family members on home purchases.  There are a few things to consider before you proceed.  First, the amount your give them will be subject to gift tax depending on the amount of the "gift of equity". It is important for you to check with a tax advisor to determine what, if any, tax liability may be your responsibility by providing the gift of equity. 

Next are the lender guidelines:  Although your gift will reduce the amount of cash required for the down payment, your parents will be required to qualify for a mortgage in all other regards. Most lenders do not allow the down payment to be 100% gift. They will require some of the down payment to come directly from your parents' savings.  They will also be required to qualify for the mortgage based on their own income and credit.  As much as this transaction is common, there are many things to consider.  The recommendation I can make is to consider allowing them a credit for the rent towards the purchase. This may be an alternative to providing a gift of equity for all or part of the down payment and it may reduce any tax implications.  You really need to speak with a seasoned mortgage professional who can best understand your scenario and advise you.  Good luck!

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Q2 - I currently have an adjustable rate mortgage which expires shortly. When it expires how do I proceed? What is my status with my current mortgage lender?
 
A - There are many possibilities here depending on the terms of your loan. They best way to determine what will happen and how you may need to proceed is to call your lender and inquire as to the terms and what they mean.  You can also dig out your loan papers and read them over.  You may find it best to refinance the loan into a fixed rate so you are not subject to payment changes in the future. Good luck.

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Q3 - What is a balloon payment loan? Are there are pro's to this type of loan? 
 
A - A Balloon payment is a term used to describe loan that has an end date prior to the full balance being paid off by your regular payments.  A balloon mortgage has the benefits of having a payment based on a longer term, but the interest rate being based on the shorter term.
These loans are very popular and even have an option at the time of the balloon to convert the loan to a fixed or variable rate program instead of being forced to pay off the remaining balance.  A common version of this loan is a 7 year loan with an interested rate that is below that of a 15 year fixed rate, but the payments are based on a 30 year loan which makes the payments lower.  These loans are great options for homebuyers with a shorter defined time period of homeownership such as military people, those who are relocated every few years, or someone looking to refinance, but not intending to move in the shorter time frame. So, there are plenty of pros if it fits, and the only real con is what might happen if you find yourself nearing the balloon payment and you are not ready to sell or are unable to refinance for some reason. 

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Q3 - How do I go about a loan modification? How do I get the process started and what is involved?
 
A - The process of a loan modification starts with the company that you send your payments to each month. They are the "servicer" of the loan who is responsible for all the payment collection, accounting for loan, and the main contact to inquire about a Modification.  They may ultimately not be the owner of your loan who makes any decisions on what will be permitted in terms of a modification, but they are your main point of contact. So take out your mortgage payment statement and give them a call.  Hope it all works out.

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If you have a real estate question for Dottie, please send it to; Dottie@RealEstateChannel.com

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