Dear Penny: Can My Sister Use the Equity From Mom’s Home to Buy a House?
My mom and sister bought a house together 10 years ago. The reason they are both on the mortgage was so my mom would qualify for a bigger home. They verbally agreed that it was my mom’s house, and my sister would rent a room from her.
My mom withdrew from her retirement fund for the down payment and has always paid 75% of the mortgage payments plus all utilities. My sister now wants to buy a house on her own. My mom received a call from a loan officer stating he needed documents from her because my sister is using the equity on the house as a down payment. When my mom confronted her she said it’s time she gets her own house and she needs help with the down payment. Can my sister legally do this?
— Fed up with the Sister Act
Dear Fed up,
If you think you have a legal challenge, I recommend speaking with an attorney in your state who can help your mom understand her rights in this situation. I can offer a general overview as well as some financial guidance that might help your family avoid this conflict altogether.
What your sister is allowed to do depends on whether she’s a co-owner of the home or just a co-signer on the mortgage.
If she’s a co-owner of the home with your mother, then, yes, she has access to the home’s equity, just as your mother does. But the loan officer is likely contacting your mother to get her to agree to the home equity loan because the house would be collateral in case your sister doesn’t make loan payments. Lenders are hesitant to approve a home equity loan without agreement from all of the owners listed on the deed, because that could make it harder for them to foreclose on the property if they needed to.
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If your sister was only a co-signer — listed on the mortgage but not on the deed — then she wouldn’t have access to the home equity. She would only share responsibility with your mom for repaying the loan, but she wouldn’t have any right to the home. If a lender is considering offering her a home equity loan against the property, it’s likely she’s a co-owner of the home.
It’s possible a representative with the lender guided your sister into tapping the home’s equity for a down payment, but it’s not her only option. She could avoid the complications with your mother by seeking a mortgage that doesn’t require a down payment or only requires a small down payment. FHA loans through the Federal Housing Administration and USDA loans both offer options for borrowers who might have trouble qualifying for a traditional mortgage. These loans come through regular banks, but they’re guaranteed by the federal government, so your sister could qualify with low income, a low credit score or a low down payment.
FHA loans only require a down payment of up to 3.5% (compared with the 10% to 20% traditional loans usually need). USDA loans are available for home buyers in eligible rural areas, and they require no down payment. You can also find state-based home buying programs that offer down payment assistance, which she could use with a traditional or FHA loan. Visit hud.gov/states to find local information.
Dana Miranda is a Certified Educator in Personal Finance®, author, speaker and personal finance journalist. She writes Healthy Rich, a newsletter about how capitalism impacts the ways we think, teach and talk about money.