Good morning, a couple questions for some of you experts.

Background: Family member's kid got divorced, and parents are helping the kid buy the house after the ex moves out. Reasonable chance the kid is bad with money and could fall behind on payments. I advised the parents to purchase the house in their name, since they're taking out the loan, and have the kid pay back the loan instead of them.

Issue: Title company apparently says they can't do this. If the house is in the parent's name, then the kid can't live there.

Question: Is this accurate? People purchase investment properties all the time. Why can't the parents who are taking out the loan, keep the house in their name, and let the kid live there? Should they switch title companies? Or is this just the way things have to be?

Rocket Mortgage, American title company

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Issue: Title company apparently says they can't do this. If the house is in the parent's name, then the kid can't live there.

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Are you sure the Title company is saying this? Or the lender?

Of course the kid can live there. But if the parents are taking out a loan as their primary residence, they have to live there too.

Also, I'm confused as to whose house it is. The parents are buying the house from their kid and ex?

I'm not sure exactly. I think the lender is saying it's the title company, and the title company seemed to say that if it's in the parent's name then the kid can't live there.

The house was solely in the name of the ex. So they're buying from him so she can stay in it with her kids. Right now parents have essentially just taken over payments on the house till they can purchase.

I'm one of the more financially savvy folks they know, but I'm not very savvy in realestate, yet they're asking me. Regarding type of loan, what type should they be looking to get if the goal is to own the home in their name, but the kid would live there and pay in a "rent to own" type manner. They're not looking to make money off their kid, but want to make sure they're protecting their finances and essentially their retirement ability.

Investment property. There's got to be a miscommunication with the title company. Anybody can live in a house you own.

Investment property is the correct answer. But that loan has much different costs and limits then other property loans. So what it is starts everything else.

I don't know the details but we definitely ran into a title insurance issue with a related party transaction that was not a primary residence loan.

Sounds like maybe Title Company thinks there is a homestead issue. I'm not 100% I understand d the fact scenario you are laying out but it sounds like the kid already owns the property (and maybe has an existing loan on it). Now the parents are wanting to buy the home from the kid but the kid will remain living in the home? Is that the scenario?

If so, I can see why title company might have an issue. The house is currently the kids homestead and the set up of that transaction sounds like it could be a scenario designed to get equity out of the home for the kid while he continues to reside there. Generally you can only do this via home equity loan (which has certain requirements that must be met).

Back before Texas allowed home equity loans, there was attempts by homestead owner to cash out their equity by selling their homes to family members, etc in what were really just pretended sales as a means for getting equity out of homestead. Courts generally found these types of transactions to be invalid and voided the sale (including lenders lien) even with evidence that borrower was acting in bad faith.

Title companies view family member deals involving homestead to be risky and it sounds like that's what they may be worried about here.

Here you go, found a link to a title underwriter explanation, they do better job of explaining the issue more clearly than I did:

https://www.texantitle.com/news/underwriting-bulletin-2022-01/

From a mortgage lender I know:

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If the Parents buy as an Investment Property....anyone can live there

If they're buying as their own homestead....they'd be risking fraud

but....I would think that they could get around that by ALSO putting him on the deed

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Yes he could be on the loan. If he's not eligible then that's out. Poor credit and all. The deed is doable. Probably needs more then a Rocket lender can figure out.

unmade bed said:

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Sounds like maybe Title Company thinks there is a homestead issue. I'm not 100% I understand d the fact scenario you are laying out but it sounds like the kid already owns the property (and maybe has an existing loan on it). Now the parents are wanting to buy the home from the kid but the kid will remain living in the home? Is that the scenario?

If so, I can see why title company might have an issue. The house is currently the kids homestead and the set up of that transaction sounds like it could be a scenario designed to get equity out of the home for the kid while he continues to reside there. Generally you can only do this via home equity loan (which has certain requirements that must be met).

Back before Texas allowed home equity loans, there was attempts by homestead owner to cash out their equity by selling their homes to family members, etc in what were really just pretended sales as a means for getting equity out of homestead. Courts generally found these types of transactions to be invalid and voided the sale (including lenders lien) even with evidence that borrower was acting in bad faith.

Title companies view family member deals involving homestead to be risky and it sounds like that's what they may be worried about here.

Here you go, found a link to a title underwriter explanation, they do better job of explaining the issue more clearly than I did:

https://www.texantitle.com/news/underwriting-bulletin-2022-01/

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Yes, sorry if I didn't explain all the details correctly. But yes, the kid's ex owns the house in his name. There is a loan still out on the house.

As someone mentioned, the kid has poor credit, so getting a loan to buy the house from the ex would be difficult - hence why parents are stepping in.

Appreciate the link and explanation.

Well if structured correctly there would be no homestead claim. Parents have a rental and a renter. The end.