Family Loan for Mortgage

[golfnut]

Hi all. Have a question.

Have a current mortgage and we are going to build a new home. We have enough income to sustain two mortgages. Excellent credit, etc.

A family member is willing to provide money that will go towards the downpayment of the new home, has cash vs. us selling assets and taking the tax hit. Once our existing home is sold, the money from that sale will go to the family member. The family member doesn't need the money back at any given time and has no desire to charge an interest rate.

How will this arrangement be looked at from a bank perspective? Obviously it needs to be disclosed, and both sides are willing to document the arrangement. While it's not a "gift" per se, again the intent is to pay all the money back, but there is no time limit for payback, nor does the family member even want us to pay anything until our other home sells. It's really a bridge loan, at no interest.

Are we asking for trouble? Could be write the loan to say paid back over thirty years at zero percent?

[KiwiJo09]

Personally, I don't lend money between family members unless it's for some medical emergency. I wouldn't get involved financially with family. It's just asking for problems. Something along the the lines of "you can afford to go out to dinner, but you can't afford to pay me back!"

[golfnut]

I can see you point, but considering the family member really doesn't need the money back... It's more of getting us into a new home, in a time where income is fine, but could use a boost in getting the downpayment on track.

[riverwed070707]

Still wouldn't do it. What happens if under some unforseen circumstances you and/or your spouse lose your job, hit hard times, etc? What happens if the other house doesn't sell? Things happen and I wouldn't want to put a family member in a tough spot when that happened. I also have a hard time understanding why someone would rather hand out an interest free loan than make their money work for them, even if (especially if?) they are already well off.

[riverwed070707]

Also, I think even with a 0% loan, an argument could easily be made that it doesn't sound like you're ready for the next home. WHy the hurry?

[golfnut]

Still wouldn't do it. What happens if under some unforseen circumstances you and/or your spouse lose your job, hit hard times, etc? What happens if the other house doesn't sell? Things happen and I wouldn't want to put a family member in a tough spot when that happened. I also have a hard time understanding why someone would rather hand out an interest free loan than make their money work for them, even if (especially if?) they are already well off.

We have contingency plans and reserves.

Simply put the individual has money and is willing to help us get into a home with better schools, which our children will start next fall. Low interest rates, low cost to build and while the market for existing homes is in the dumper, unless something catastrophic happens, job-wise, we can do this -- And could do it without help, but have to sell off assets, that would incur taxes. This individual has cash, willing to float the loan.

Heck, this could all be real easy, just have the person gift the money, goes against the $5M gift tax cap and call it a day. But I'm not looking for a gift, and want to pay back all the money provided.

[golfnut]

Also, I think even with a 0% loan, an argument could easily be made that it doesn't sound like you're ready for the next home. WHy the hurry?

Not really following. I'm not the one setting the 0% loan, the lender insists on it. They're not in it to make money.

The "hurry" is getting our kids adjusted to a new home before they go off to school next fall. And mentioned above, it's a pretty good time to build/buy.

[disneysteve]

I'll give two answers. The first answer is to completely agree with the advice already given. Never lend money to family. Never borrow money from family. It opens you up to way too many problems and in almost every situation should be avoided at all costs.

That said, I have to give my second answer. There are exceptions to every rule. My cousin recently moved to a brand new house in Florida. He has plenty of money but for tax reasons, our accountant (another of my cousins), advised him not to take any more out of his accounts until after the first of the year. That left him a bit short on cash so my wife and I lent him $5,000. He will repay us in January. I have absolutely no fear that he will not repay the loan. He is already retired and I know exactly what he has in assets. In fact, I am the beneficiary of all of his accounts as he is single and childless. If anything were to happen to him, I inherit his whole estate anyway so 5K is irrelevant. And we can live just fine even if I never see that 5K again. So even though the standard advice is "don't do it" sometimes only you know the whole story and it really isn't a big deal.

[snafu]

Many families participate in a 'family trust' to give younger members a boost. The loans are written, formal, contracts although all know there are no legal consequences if there ever was a default. I suggest you review the law, in your community the loan must be vaguely market value. Another alternative might be to put assets as collateral for a loan. You needn't sell them, just pledge.

[cschin4]

I would be very careful about deciding what someone else "needs" in regards to theri money. And, whether they "need' it now, life and circumstances change and who knows if someone won't need it in the future. In my opinion, mixing finances with anyone is a bad deal and recipie for disaster. Either go through normal channels of taking out a loan or saving for it yourself.
As for payback, would you really go 30 yrs to pay someone back? I could possibly see borrowing but then immediately paying back ASAP but not a 30 yr payment.
Also, there may be some tax implications as someone cannot just give you money without you declaring it.

[BuckyBadger]

You could write it up as a loan at market value, but then the people could "gift" the interest back to you. There's nothing that says you have to write it up as requiring regular payments. Write up a loan for, say, $50,000 at a rate of, say 3% compounded annually with payment due 2041 with no prepayment penalty. Then you pay it off whenever you want and your relatives "gift" you the interest. It would take 8 years for the interest to go past the $13,000 gift limit, and if you're married, they can forgive $26,000 of interest.

Now, this may not be necessary, but it certainly makes it above board!

I come from a family that has been historically good with money and we have often loaned large amounts of it between family members. My mother holds my brother's mortgage (in a very official way) and my father has always been his banker for car purchases. My dad loaned me enough money to buy my first house with a lower rate that I paid him back when I sold it. If you have a responsible family it can be fine.

Of course, if you don't have a responsible and trustworthy family you might end on Judge Judy...

[Frugal]

I also don't do loans between family members. I have heard they work out poorly in most cases.

[scot184]

It'd be best to have them gift you the money now and get it seasoned in your checking/saving account for two months, that way you won't need to get into detail about where it came from...that's the best way.