A while back I had a client walk into the office and ask me this very question. With a business based on referrals, it’s rare we see anyone walk into the office randomly and ask for a pre-approval but that’s exactly what “Nate” did.
You may have heard the term ‘Arms Length Transaction’ which is the term used for buyers and sellers that are not related. This is the most common type of home sale. When someone is buying from a relative, it’s referred to as a non-arms length transaction and Lenders (or banks) each have their own rules regarding what can and cannot be done in regards to financing. If this is the case, make sure you let your Lender know so they can take the appropriate steps and ensure what you will be allowed to do before making any promises. Not all Lenders are created equal, trust your gut.
In Nate’s case, I knew the Lender we were working with would suit his needs. There were several items that needed to be attended to: He didn’t have a down payment for buying the home, he didn’t want to use a Realtor to keep costs down and he wasn’t sure what price his mother would agree to. Okay…
Here’s how we managed these speed bumps: First, we decided that the sales price should be fair to both sides, so we had the appraisal done first and then each of them could decide it they wanted to buy/sell for that value or agree to lower terms. Second, we took that price and determined what Nate would need for a down payment and had his Mother generously give him a ‘Gift of Equity’ which was used in lieu of a down payment. Finally, I referred Nate and his mother to a good friend of mine who happens to be a great Real Estate Lawyer. He drew up the contract for them so we could proceed.
Bottom line: Nate walked into my office with a job and okay credit history with the hope of keeping his childhood home in the family. He walked out a month later with the keys to the home that was now his. Where is his Mother going to live now? I never got a straight answer?? I hope she treated him well as a kid!
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