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:

1. Bethany does not work and has no income.
2. Bethany and Rob own a second home and all expenses associated with it are theirs alone.
3. 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