Father Selling to Son Who is On Deed

This is another question that came up in a forum. Take a look:

"In short, my father applied for a mortgage as a 2nd home (my primary residence) and put 40K down. I pay the monthly mortgage and was added to the deed last year. What is the most efficient, cost-effective way for me to get the loan into my name and recoup my pops 40K back to him? My initial thought is to simply apply for a new mortgage with a cash out HELOC. Home is worth approx 370K with 303K left on loan. Also can he sell for less than value and claim a loss?"

Someone else responded before I did and said:

"The best way to go about this, which I have helped a lot of folks in exactly your situation, is to refinance the mortgage under your name, take $40k of equity out in the refinance, and pay your dad back with the money you acquire. There is no need for a HELOC and the interest rate will be variable. With interest rates set to continue to rise, I suggest all my clients to get into a fixed product with a defined end date."

Here is my take on the best way for this consumer to get his dad his money back:

Conventional cash out loans are limited to 80% of your appraised value. If you owe $303,000.00 and the home is worth $370,000.00 you are already at 81.89% LTV. Adding $40,000.00 to your balance would put you at a loan amount of $343,000.00 which is 92.70% LTV. This just won't work. Even FHA, which goes to 85% LTV for cash out transactions, won't get you what you need.

There's one way I can think of to get your dad all of his $40,000.00:

Buy the house from him. He will have to sign paperwork giving you a gift of equity of 7.3% which comes out to $27,000.00. That means that you will have to finance the other 92.7%. You'll be able to do this on either conventional or FHA loans. 92.7% of the sale price of $370,000.00 is $343,00.00. Once your dad pays off the current balance of $303,000.00 he will have $40,000.00 left over and you will owe $343,000.00 on a new loan.

There's a few more details to worry about such as realtor fees and closing costs. You'll either have to pay those out of pocket or increase your loan to cover the difference. Hopefully you can find a realtor to handle the paperwork for a flat fee (~$500.00) or you can skip the realtor altogether and use escrow instructions as your purchase/sale agreement. I did this here in California last year in July. If you aren't in California you should look into limitations for this type of transaction in whatever state you reside (you should look into this even if you are in California). The key term is "non-arm's length transaction" and it indicates that the buyer and seller have a relationship outside of the transaction.

Another option is to refinance the home solely in your name. With good credit you can obtain one loan for 80% and a HELOC for the other 10%. However, this will only get you to 90% LTV which means total financing of $333,000.00. Your dad will be short $10,000.00 but you'll save some money on realtor/escrow fees. No cost loans are the norm now and you can find one easily. Maybe your dad will let you pay him back the other $10,000 next time you refi or when you sell the home.

Feel free to PM me if you have additional questions and good luck!

Edit: I realized after I posed my response that I skipped your question about selling for less and claiming a loss. That's a questions for a CPA and I prefer not to comment when I'm not too clear on the answer.