Loaning money to my parents

[Mariner]

ello,

I would appreciate any advice the community can give me on the following situation. Last year my parents were given a house and subsequently purchased land to move the house to. The house was in good shape, but there were significant expenses involved in moving the house, purchasing property, repairing the house, and other general construction issues. Their plan was to finance it by borrowing against their retirement funds. They later discovered that they could not get a home loan for construction related expenses or for property without a home. They would have had to get a construction loan which had significant requirements. To keep them from losing the opportunity of the free house and to purchase some property, I loaned them $40,000. With this money they were able to buy property, move the house, and cover the construction related expenses. They did most of the work themselves.

My mother is very eager to pay me back, however, to do so she has to take out another loan. She has the difficulty now of convincing the bank that she is purchasing something. The house was free and has no deed. All they bought was the property. She suggested that we create a purchase order showing that she purchased the home from me which she would use to get a loan on the property. I worried that this would legally count as a capital gain since it would show me as the previous owner and I would be obligated to pay taxes on it. The other possibility is that she applies for a personal loan, again borrowing against her retirement. My mother is really adamant about paying me back now, though I insist it isn't necessary. I want to keep any potential financial hassles to a minimum.

My first option is to consider any potential tax obligations that could arise from me being listed as the seller of the house on a form my mother will use to apply for a loan. The second is to hope my mother could get the personal loan which would require none of the paperwork. The third is that I formalize my loan and she pays me back overtime, something she doesn't want to do.

Are there any other options I could consider?

[Petunia 100]

Basically, your parents want to do a cash out refinance. If the home appraises for enough, I don't see a problem getting a mortgage. Do your parents have income and/or credit problems?

Under no circumstances would I create a fraudulent purchase order. I fail to see how one would even be helpful. The lender doesn't care what the house cost. The lender is concerned with the value of the property and the ability of the borrower to repay the debt.

How old is your mother? Perhaps instead of borrowing against her retirement, or against her house, she could simply take a distribution from her retirement accounts.

And yet another option is for your parents to begin making monthly payments with interest to you, instead of to a bank. Unless you have a pressing need for this money, you may want to consider this option. It will save closing costs and may possibly be a nice return for you (depending on what you would do with the 40k if it were repaid today).

[Mariner]

My mother is 53 years old and both of my parents are employed full time with the federal government. I am uncertain about their credit, but do know that my mother has a good amount of money saved in her retirement fund. I do not think borrowing against it would be a problem. One reason I can think of she may have chosen to want to borrow against her retirement was a very low interest rate, but I do not know that for certain. I will ask her if she tried getting a mortgage on the property. As of now it is completely paid off.

I old them that monthly payments are fine, but mother is the type that doesn't want to feel like she is burdening her kids. She was very reluctant to borrow from me and has resisted my suggestion that we formalize the loan and a payment plan. I am financially secure without the money and was glad to be able to help my parents. They were able to get much better home and property than where they had been living. Despite my assurance to my mother that I am financially secure and that I loaned the money knowing it could take a while to be paid back, she insist she borrow money from elsewhere to pay me back. If not, I feel she will make me owner of the property my parent's bought.

The problem they have had is with the nature of the home purchase(which was free and on a different lot) and the purchasing of the property. Thank you for the advice about the purchase order. That confirms my suspicions. But, what is wrong with completing the loan as such?

[photo]

I old them that monthly payments are fine, but mother is the type that doesn't want to feel like she is burdening her kids.

Maybe it isn't relevant, but is there some reason your parents didn't have any savings of their own (other than for retirement)?

...she insist she borrow money from elsewhere to pay me back. If not, I feel she will make me owner of the property my parent's bought.

Although she may feel she is doing you a favor, your being an owner of the house is a significant liability. If someone becomes injured on the property, that person can sue the owners, which includes you.

[Mariner]

I have always been frustrated by my parent's lack of savings. Partly, it is that for most of my life my family didn't make much money. Whatever my parents earned went to expenses. My father was until recently unemployed. Also, there were a couple of times recently when my siblings got into trouble and leaned on our parents for money. My younger brother had legal issues that required a lawyer.

I did not consider the potential for liability on the home. Thank you for pointing that out. I will specifically state to them that I do not want to be considered the owner.

Most of this complication has risen from the loan requirements. First, the bank couldn't loan money in oder to buy a house and property separately, and second, now that they own the property they are limited in how they can borrow.

They have plans to pay this house and property off within 7 years. They currently also own a large piece of rural property. Are there any other borrowing options that haven't been considered. I will check with my mother to see if she tried just taking out a traditional mortgage on the new house.

[Slug]

You could consider Prosper.com or lendingclub.com. They both offer personal loans. In fact you could even buy your way into a piece of the loans on that site and generate a return.

[Petunia 100]

Who told them that they are "limited in how they can borrow"? Was it a loan officer at a bank?

Is the house livable, on a foundation with plumbing, appliances, electrical all installed and working? Do they have a clear title to the property?

I'm just trying to understand what the impediment is.

[Mariner]

I am trying to understand the difficulties too. Unfortunately, I live no where near my parents and so can not readily talk to them about what difficulties they have had in getting a loan. There is a possibility that the house doesn't have a title but the property itself does. The house was the major expense. It is completely livable now.

Earlier this morning I sent an email to my mother asking for more details about the types of loans she has considered and why she hasn't been able to get them. More details may be forthcoming. I also encouraged her just to pay me back overtime, which is my preferred method.

If she asks why I won't sign a the purchase order what should I say? Is there another reason other than tax liability?

[photo]

I'm not one to tell people to run to a lawyer with every little question, but it seems there are many issues here. I would write down every concern and then ask the lawyer. Not having a clear title is but one issue that may prove very problematic in the future.

[Petunia 100]

Again, why would you sign a purchase order? What difference would it make?

(BTW, I am assuming you mean "bill of sale".)

Is this a mobile home?

[cschin4]

It just goes to show that a free house isn't free. First you have to buy land to put the free house on, then move the free house. And, moving the house really seems like that was quite an undertaking. I think all of your lives would have been much simpler if they just sold the free house where it was and then use that money to build whatever home they wanted.
So, now that it is an established home, why can't your parents just take out a HELOC or Home equity loan and use that to pay you back?

[snafu]

It seems your mother has a limited understanding of finance. She is determined to make a profit for the bank/financial institution even though it is detrimental to both of you. You need a paper trail between you and your parents. A family trust document can show you loaned your parents $ X. and they agree to re-pay the loan at $ X per month including interest for X number of years.

If you don't like that idea you can write the agreement as a mortgage. The amortization schedule will have most of the payment as interest until almost mid term. Your mom would get the interest credit deduction and you will be taxed on your profit.

[Mariner]

My understanding of finance is limited too. I guess it runs in the family. But, I have figured out of her motivation for the bill of sale idea. She is a federal employee and so has the federal version of a 401k, the thrift savings plan. I think she wants what is essentially a 401K loan from her thrift savings plan. If it shows she bought a house then her loan term is extended beyond 5 years. I haven't heard from her yet, but after researching the issue some more I think this explains some of the situation. So, she probably is able to get other forms of loans, but prefers this for its low interest rate (2.5%). If she is really adamant about paying me back then I have suggested she try to make the same loan a personal loan, avoiding the fraudulent paper trail. And I have pushed her to accept it as a personal loan. I would love to have the money back to invest, but after letting her down in other ways, I am happy to be able to help now.

[Petunia 100]

My understanding of finance is limited too. I guess it runs in the family. But, I have figured out of her motivation for the bill of sale idea. She is a federal employee and so has the federal version of a 401k, the thrift savings plan. I think she wants what is essentially a 401K loan from her thrift savings plan. If it shows she bought a house then her loan term is extended beyond 5 years. I haven't heard from her yet, but after researching the issue some more I think this explains some of the situation. So, she probably is able to get other forms of loans, but prefers this for its low interest rate (2.5%). If she is really adamant about paying me back then I have suggested she try to make the same loan a personal loan, avoiding the fraudulent paper trail. And I have pushed her to accept it as a personal loan. I would love to have the money back to invest, but after letting her down in other ways, I am happy to be able to help now.

Oh, that makes sense now (her reason for wanting to show she paid X for the home). Personally, I would not do it. Its dishonest, and the intent is to get around the rules to do something not allowed. But if you choose to do it, I think the chances are good nothing would ever come of it. That is your decision to make.

Is the home a mobile home or is it a site built home which was moved?

If it is a mobile home, then a mortgage is out. Some banks won't even lend on a new mobile home, no bank will lend on a used mobile home, on your own property or not.

You are a good son/daughter for helping your parents out this way. Its great that you were in a position to have 40k you could lend them. Good job!

[Petunia 100]

BTW, if your mom borrows 40k at 2.5% on a 5 year note, the monthly payments are $709.89. Since they have no mortgage or rent payment, prehaps that is an affordable amount? Then in 5 years, they are done paying. Since your parents are approaching retirement age, they may want to avoid stretching the loan out for a longer period of time anyway. 2.5% is a great rate.