[vortex71]

I have a couple of questions in regards to obtaining a home equity loan. I will give some background as it is an unusual situation. My wife and I live in Auburn, Alabama. When we married and moved here in 2001, she owned a house in Birmingham, Alabama (about 120 miles away). Before she was divorced from her first husband, her father, as an individual, bought their mortgage from the finance company and executed a documented and filed new mortgage for $69,000. While her first husband's name is on the loan documents, the deed only lists her. Her father did this to protect her from her then husband using the equity in the house to run up more debt. The divorce became final in 2000, and there is no more interest in the house from her first husband. Her father does not require her to pay anything on the mortgage, that is part of her inheritance. For the past few years, my wife's daughter and her family were living in the house, but have since moved out. We are remodeling the house to put on the market, and would like to get a home equity loan for $27000 to use for the remodel and repair. While we have not had to pay any on the mortgage, her amortization schedule shows we would owe approx. $63000 at this point. The house is worth approx. $105,000 as it sits. My questions are, will the fact that her father is the primary lien holder affect her ability to get a home equity loan, and will her credit scores of 680, 678 and 634 be a hindrance since this house does not qualify as a primary residence? She has three dings on her credit report, one medical bill from her first husband, and two utility bills for her daughter that were in my wife's name. All have been paid, they just have not fallen off her report. Her income to debt ratio with the new loan added to existing debt would be 22% on a monthly income for her of $3800. I realize this is a long inquiry, and I appreciate any assistance you can offer.

[wynelle]

Well, first off, this is a rental property not a primary residence so all the "rules" about getting a mortgage, refinance or home equity loan don't exist. There are different standards and requirements when attempting to take out a loan for rental properties.

Second, I'm willing to bet that there are some IRS violations here. If your wife's father bought out her mortgage and is not requiring her to make payments, then it is a "gift" and can possibly be considered taxable income. Since he isn't "dead" it can't be an "inheritance." And a gift of $69,000 definitely exceeds the $13,000 gift allowance.

Then the current tax situation- as you have listed it, the selling price is about $105,000 and the loan balance total would be about $90,000. But then there is the closing cost, the commission to the realtors, etc. And how would they calculate capital gains tax?

I think you need a good financial specialist to answer these questions. I'm willing to bet that her father is going to have to do some documentation and official statements about not requiring repayment of the loan, etc also.