Can I Buy a Foreclosure Property if it Belongs to a Relative

By Gina Pogol
Mortgage Credit Problems Columnist

Craig Asks: Dear Gina, I'm a first time home buyer who can't buy a house because I have bad credit. Recently, my brother got into financial trouble and he is about to lose his home. He said he would be willing to sell it to me very cheap rather than losing it. How do I go about buying his home?

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Gina Says:

Dear Craig,

There are a couple of issues here. I'm assuming that because your brother does not want to lose the home to the bank that the bank has filed a Notice of Default but not yet taken title and possession of the property. If a foreclosure has not been completed, the property still belongs to your brother and could possibly be short-sold.

However, many banks do not allow non-arms-length transactions on short sales. From the lender's point of view, there is too much potential for fraud. Family members could buy the house for a fraction of what's owed, and probably for less than it's worth, then turn around and sell it back to the person who defaulted. I'm not saying that you would do this, only that the lenders are very uncomfortable with this sort of sale. Your best bet is for you or your brother to contact his lender and find out if it would allow such a sale. If so, then you need to find out if the lender would be willing to finance you, given your credit problems. You might also want to complete the form on this site; lenders will contact you and let you know if you qualify for bad credit financing.

The second point pertains to the first time home buyer tax credit. The IRS specifically prohibits people who buy property from relatives from taking advantage of the credit. Again, this is to thwart those who seek to defraud taxpayers by arranging a "paper sale" to generate a tax credit but involving no real transfer of property. So by buying your brother's property, you'd be forfeiting the chance to get an $8,000 tax credit, assuming that you meet the income-qualifying requirements.

Finally, the consequences of buying a property in a short sale and concealing your relationship to your brother could be severe. You could be sued and your sale reversed. The IRS could pursue a fraud case against you--definitely not worth it.

Depending on how bad your credit is, you might be able to turn it around enough to qualify for an FHA mortgage by the June 30th deadline to get the first-time buyer's credit (You'd have to be under contract to purchase a home by April 30th), or you may be able to find a seller who would be willing to finance you for a year or two while you clean up your credit. A reputable credit counselor could help you set up a budget and clean up bad credit--helping you qualify for a less complicated, IRS-approved, arms-length home purchase.

Good luck and thank you for writing.

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