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A Babyboomer Trap: Family "Arrangements" Can Destroy Your Ability to Qualify for a Mortgage

This is the story of Bethany and Rob, empty nester babyboomers who thought they were doing the loving thing by agreeing to care for an elderly parent. They ending up being being slapped in the face by a harsh lending world that has no sympathy for "family arrangements".

Bethany and Rob owned a second home that was located near most of Bethany's immediate family. This getaway enabled her to visit her family often, enjoy shopping in a more urban environment, and experience an alternative climate to her primary residence (which was only several driving hours away).

Both Bethany and Rob had full time jobs and could easily afford both homes.

Then, tragedy struck. Bethany's mother died. She had been taking care of Bethany's father, Milton, in a distant city. Who would care for Milton... now 91 years old?

This created a problem shared by thousands of aging Baby Boomers here in California: How do you rearrange your life and your finances to take on the role of caretaker?

The parents of Babyboomers are now in their 80's and 90's, and are proving to be a sturdy lot, outliving their parents by decades.

The solution seemed fairly simple to the family. Milton would move into Rob and Bethany's second home. Bethany would quit her full time job, commute to her second home each week, and be his live-in caretaker.

The family was thrilled to allow Bethany to be compensated from her father's substantial savings for her job as care taker. It was actually far cheaper than placing Milton in any type of assisted living situation. The family also wanted Milton to live out his final years surrounded by his family, and in a "real" home.

In addition, it was decided the payment on the house, and all other expenses associated with the house, would be paid from Milton's account.

No one in the family thought Milton was "RENTING" the house from Bethany and Rob. Bethany and Rob continued to claim the house as their second home on their tax return as one year turned into another.

No one in the family thought Bethany had a paying JOB. Checks were written to Bethany randomly, and as she needed the money. It was not claimed as income on her tax return, because it never really seemed like income, and Bethany had mixed feelings about even being paid for taking care of her father.

No one in the family thought this arrangement would last for years. But Milton thrived in his new environment, and remained healthy and alert as he advanced into his 9th decade.

Bethany and Rob never considered that any of this would have anything to do with becoming qualified to REFINANCE their primary residence. With the payment on the second house being made by Milton, and the small amount of income she received from her father, Bethany and Rob were doing just fine financially.

But here is how the lending world looks at "family arrangements" like this one when you apply for a mortgage:

Bethany does not work and has no income.
Bethany and Rob own a second home and all expenses associated with it are theirs alone.
Bethany and Rob have a debt to income that is 70% and cannot qualify for a mortgage.

Anything Bethany and Rob might have saved on taxes from this family arrangement will now be quickly eaten up by making a much higher payment on their residence than a refinance would have allowed.

The HARSH REALITIES of the lending world continue: you may only document income in a very narrow range of ways, or it simply WILL NOT COUNT AS INCOME.

Before entering into what appears to be a casual or temporary "family arrangement", think carefully about how it might impact your future ability to refinance, or to buy a home.

Talk to your mortgage professional, who will have a (painful) awareness of the strict DOCUMENTATION REQUIREMENTS now required by lenders.

Written by Janet Guilbault, Mortgage Lending Expert Based Out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 01/02/2009 04:58 PM

Comments (49)

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49 Comments on A Babyboomer Trap: Family "Arrangements" Can Destroy Your Ability to Qualify for a Mortgage

JAN

Janet, this was eye opening. I'm so glad that you wrote it and shared it. We see many creative arrangements made by people in our age group to take care of elderly parents and I would never have considered the above scenario hurting the care givers.

Dear Janet,

Sounds like Bethany and Rob needed to spend some bucks on a financial planner before they made arrangements.

This is a good lesson for all of us with elderly parents.

Thanks,

Barbara

Janet, This post shows why it is so important to seek advice when doing these types of arrangements. A taxman is usually a good place to start. Lenders have ZERO common sense.

Janet~

I subscribe to your BLOG and although I may ot always comment, I do SO appreciate your posts! I am re-Blobbing this one...again THX!

Bryant: Here is what I find: most people do not even consider being officially paid for the services of caretaker. I think we believe we "owe" this to our parents, and maybe we do.

And most people don't think of making any kind of plans because honestly? They wonder how much longer their parent will live when he is already "that old".

So things just sort of fall into place without a plan, however this is a big mistake. I am not a financial planner, and I would welcome one to chime in, but the reasons to formalize this arrangement are far greater than just a getting a mortgage.

Barbara: Do you think people think of financial planners in this situation? I think if Bethany and Rob were ready to retire, and suddenly had to decide what to do with his $350k pay out, they would call a financial planner.

In the caretaker situation, I am not so certain they would consider any financial planning needs to be done.

But if you think about the actual cost of giving up a job, not just the income, but the social security, benefits, experience, etc., for YEARS, that could easily amount to 100's of thousands.

Kris: Creative is really a key word. Often I see some sort of trade going on...but rarely is anything formalized. These arrangements develop over time, and for the most part, work just fine.

But they can come back and bite you. It is worth thinking about.

Janeanne: I love my subscribers. Thank you, and I am so happy you found this post worthwhile enough to re-blog.

Folks should consider obtaining expert advice about the tax implications of these arrangements and the financing implications BEFORE jumping into the deep end.

DIY is find for home decoration, but when it comes to anything involving taxes or mortgage financing, expert advice is the best buy in town.

Great feature Janet.

That really stinks. I am still happy that Bethany and Rob are able to care for Dad. Great reminder regarding what lender's count as income.

We (in our late 40's-50's) are certainly the new sandwich generation- while nothing financial will come close to the dignity afforded their relative, this is a sobering scenario for those of us looking at the possible ways to assist relatives- thank you, Janet!

Janet, great post and blog ! Is harsh the final realities sometimes. Thanks for sharing this - it is important to know the true ramifications from these types of arrangements.

Very well laid out so readers could understand the chain of events... you created quite a clear picture. It's easy to see how many people could fall into this "trap" and I can think of a few to whom I will email this post.

It seems a bit unfair to target the lender as the bad guy here. To my knowledge (and you may know better than I), lenders can only use income that can be verified, and if it is not being reported (for income tax purposes), it cannot be verified. Lenders too have to follow a strict set of guidelines and their attention to and adherance to these details is fairly important (and we have all seen the dire consequences of lenders getting too "loose" with their lending practices).

I believe it was a very noble thing that she did and she should be commended. Unfortunately, people don't think about their ability to qualify for a loan and find out the hard way when they absolutely need money and can't get it. In my opinion, it is a person's responsibility to keep their own financial "health" in check and this would include knowing how big changes (such as quitting a full time job) may affect their ability to borrow.

Thank you so much for a well written post that was a real eye-opener! Speaking as a baby boomer, we are closing in on the same situation (only we don't have a second home). Thank you for making us more purposeful on our future arrangements!

Great post - very informative - it seems so tricky now, not only in that situation, but also with the self-employed... so many things to worry about in qualifying!

Congrats on the Feature - Happy New Year!

Wow. I would have never even thought of this scenario, for any reasons. But one thought did occur to me. Why hadn't the parent prepared for their own years when they would need help? Or maybe this was something that had already been discussed? I mean, it's obviously the best scenario for the elderly, but not everyone would have the circumstances to even undertake this. But most importantly, once they've applied for a loan and been rejected, is that now reported to the IRS? Can they now be audited? Is this arrangement wrong across the board, or only in the eyes of the lender?

A great blog explaining documentation requirements for family arrangements

Yikes. That is scary stuff to people with aging parents. Thanks for the heads up.

A client of mine just went thru a similar nightmare. She was her mother's caretaker and even thought they did not live together, she mixed some of her purchase with her mother's. It was complicated to prove to the other siblings the reimbursments were legitimate. One should always make sure everything is recorded properly when dealing with family matters.

Once again people doing the right thing can't get a break. Isn't a shame that everything you do has to be calculated and then is subject to change daily.

Wow awesome post. This is so true and it should be plastered everywhere.

Janet thanks for the post its a real eye opener. I think we all need to be ready for some drastic changes in our lending institutions.

Why, thank you, Lenn. One of the points of this story is how no one in the family considered this situation as anything that required professional assistance. Of how ramifications exist for something that appears to be stirctly personal. You, and the rest of my readers would be amazed to know that this same story, with different variations, is being played out again and again.

This is a situation that doesn't get much attention, but is very real.

It is only when they come to the mortgage broker because of something they consider compeletly unrelated that they realize this: they should have taken this personal matter and documented it as if it were a business.

Opportunity up in smoke.

Janet- This was such an interesting post! I don't think many of us would have imagined this situation. Thanks for bringing it to our attention.

Ilyce: Your name is fabulous. I have a weakness for names that start with "I". It is interesting to see how people re-arrange their lives to care for their aging parents. In almost every case, someone gives up a job. I wanted to make sure everyone understands the importance of DOCUMENTED INCOME.

Craig: We all need to be focused on having income that can be proven through documentation. In the old days, these kind of scenarios did not come to light. We mortgage brokers had stated income loans, and simply "stated" what Bethany was earning.

Now we can't.

Mike: I consider this a kind of heads up post. Thanks for commenting.

Charles, I think you are the only one to make this kind of comment, but perhaps others felt a little outraged like you did. I agree with you.

There is something wrong with a system that penalizes what Rob and Bethany did for Milton. Shouldn't they be celebrated and rewarded?

Rocha Team: I see what you have mentioned as one of the main issues. Once someone is in control of their parent's finances, several things happen. One is obviously the potential for abuse (which was not the case with Bethany and Rob)

The biggest problem is co-mingling funds as you have mentioned, instead of having a clearly defined system of paying someone to take care of these matters.

Is the primary problem that she did not claim the income on her tax returns? If she had claimed the income, and were therefore "employed," then the debt to income ratio would also have been lower. Would that one thing have made a difference, or would the fact that she was self employed have counted against her anyway, in terms of the bottom line net income on her tax return?

Are self employed people still being penalized for writing off legitimate business expenses?

I am not sure why lender underwriters seem to be very simplistic in thought. It is either "anything goes," or the skids are applied. Nothing in between, even with legitimate explanation. That's my take, anyway.

Wow, Lisa, those are some important questions. The answers are muddy, and I am not qualified to answer.

I suppose Bethany and Rob could still say this is their second home and that would be the truth. It isn't against the law for someone else to make your payment, right?

Making an application for a mortgage, and claiming income that you are not claiming on your tax return would not trigger an audit in my opinion. If someone else knows the answer to this question, I would welcome a second opinion.

As to why the family was not more prepared for Milton's situation...well that is at the heart of the problem, right? I am guessing they assumed Milton's wife would outlive him.

Deborah: At a minimum, Bethany should have been paid on a regular basis with checks from her father's account and claimed this on her tax return. This would have given 2 forms of proof that this was ongoing, legitamite income as a caretaker. She did neither of these things.

There should have been a rental agreement between Bethany and Rob and Milton. Milton should have paid rent to Bethany. Instead, a different sum of money was taken out every month to cover the payment and household expenses.

The lender wants PROOF of ongoing income.

PS Can I get signed up for Santa Cruz properties again at my new e-mail address? I loved those reports from you I used to get when I was at my old company.

As the old saying goes - "no good deed goes unpunished".

It is sad that our system is set up for our parents and grandparents to end up in nursing homes instead of being cared for by family. We recently discovered that by putting Grandpa's check into Dad's bank account and paying his bills from it meant that he co-owned Dad's account! It is always good to talk to the financial planners when making decisions regarding our elderly ones!

Hi Janet! Of course! Sorry, I did not greet you properly. I get so upset at some of these things! Happy New Year at your new company.

Lisa T: Guilty as charged. I did make the lender sound like the bad guy in this post. They are not.

You are correct to say that a lender must abide by a set of guidelines that require documeted income from tax returns. It is not the lender's fault that Rob and Bethany chose to take this income with reporting it, and not to formalize their arrangement with Milton regarding him renting the house.

I think this situation, however, is an easy one to fall into. When they began, they probably figured it would be a short term thing, and were simply figuring things out as they went.

That is why I call it a TRAP. You are unaware until you fall in.

Deborah: and Happy New Year to you. I hope to meet you this year...I miss Santa Cruz so much!

This is likely a scenario that is affecting thousands of people in various ways. It is a fact of our society these days.

Bob and Carolin: You are correct! I have watched so many of my friends have their lives turned upside down and inside out as a result of this situation. I wonder why we as a society don't give this more attention.

Teresa: Wow! I did not know that. Maybe we need elder advisors instead of financial planners.

I am thinking of so many ways that we are blocked from being able to help the older folks. Example: the reluctance of cities to allow granny flats and guest houses.

We should be encouraging this, not making it impossible.

Janet: This is a very interesting story. It is a shame that this can happen. Of course it is the way things are. Something people need to keep in mind.

This is unfortunately too true a story suffered by many people in this day and age who do not understand the mortgage world.

Very informative, thank you Janet. People say a good attorney is worth the money, the same can also be said about having not just finding a good loan officer, but having a relationship with one so one can be proactive to prevent situations like this from occuring.

Good relationships are essential.

JAN

Janet, this is great information. It is a reminder to seek professional advice before making such decisions. I just don't understand the way lenders think. I agree with Bryant that they have zero common sense!

Wow, this is good stuff. For me I'm caught in the can't refinance because we always went stated. Now my neighbors who we own our lake house with want to sell, we could buy them out but I can't get a loan to do so. We're thinking maybe a land contract with them. What do you think?

Janet this was terrific information to share. It is always wise to see the advice of a lawyer and accountant when considering any type of relationship affecting real property and finance.

Wow! Very good post. Alot of us need this kind of info, no question. My parents are in their late 80's and could end up moving in with my youngest sister. Will check ahead and see how any income/payments to her could impact both her and my parents. Thanks.

Thank you for sharing this insight. There are so many changes and restrictions in our lending institutions and programs it is great to get updates like this.

Janet, Thank you for this blog. I am 26 and my parents live with me at the moment due to the financial reasons. They don't plan on it as forever thing but they are in there 60's and don't have much savings and they thought might be since I am in real estate to invest in a 2nd home, townhome or condo for them in the future. This helps a lot to know what I need to do when the time comes.

JAN

Janet - there are so many variations on this theme, where major life decisions being made end up "interfering" with lending criteria/guidelines. This exact situation - multiple generations living together - is one of the points our County is considering with its land use plans to meet housing needs.

JAN

Wow, what a unique topic. It is so easy to fall into the rhythm of taking care of the ones you love without thinking of the legal or financial ramifications. One more example of why this kind of family planning is a necessity.

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