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Dr. Don Taylor, CFA, Bankrate.com advice columnistRent to own parents' home

Dear Dr. Don,
I am thinking of purchasing a home that I currently rent from my parents. The home was assessed at $125,000 and they currently owe $102,000. They are willing to sell me the house for what they owe. Can they co-sign a mortgage for me to purchase a house from them? I have a high debt-to-earnings ratio, which, as of last year, only qualified me for a $42,000 mortgage. I would love to be able to qualify for a mortgage, but at this point it looks like having them refinance and then selling to me on a three- or five-year contract is about the only way I can get the house. Any advice you can provide will be greatly appreciated.
-- Andrew Acquisition

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Dear Andrew,
I think your parents should structure a lease-purchase option for you to buy the home. A portion of your rent would go toward buying the home while the balance covers their cost of carrying the mortgage. They can gift the equity they have in the home to you up to the current limit of $11,000 per person $22,000 per couple per year.

Work with a real estate attorney and tax professional to structure the agreement to meet the needs of both parties while maximizing the benefits associated with a transaction between family members.

Your parents could co-sign a mortgage note, even though you are buying the house from them. The mortgage lender doesn't care who you're buying the house from, it cares about the loan-to-value and the risk involved in extending credit to you and your parents. I don't like this option as well because you're putting your parents' credit at risk to finance your goals. When a lender requires a co-signer, the co-signer is taking on a credit risk that the lender refuses to accept. The FTC's electronic pamphlet Co-signing a Loan, is required reading for your parents before they even consider this step.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Oct. 20, 2003
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